Tax tips for Family Businesses

WITH REPORTS THAT a mini house-buying boom post lock-down is leading to house prices increasing, Shipleys Tax looks at one of the reasons for the mini-boom – the Stamp Duty cut. To increase confidence and gain momentum in the property market, the government cut stamp duty until 31 March 2021. In today’s tax note we look at how who benefits, and whether now is a good time to buy or sell a house.

The Stamp Duty Cut

From 8 July 2020 until 31 March 2021, residential Stamp Duty Land Tax (“SDLT”) threshold is increased from £125,000 to £500,000. Above £500,000 the normal residential rates as previously apply. SDLT applies to properties in England and Northern Ireland.

The rate of residential SDLT applying from 8 July 2020 to 31 March 2021 are as shown in the following table.

Residential properties only

The increased threshold applies only to residential properties; the threshold for non-residential and mixed properties remains unchanged at £150,000.

For SDLT purposes a residential property is defined as:

• a building used or suitable for use as a dwelling, or is in the process of being constructed or adapted for use as a dwelling;
• the garden or grounds of such a building, including buildings of structures on such land;
• an interest or right over land that subsists for the benefit of such a building or land (for example, a right of way).

The test is at the effective date of the transaction.

Prior to the reduction, the non-residential and mixed rates were lower than the residential rates, so it was in HMRC’s interests for the property to be classed as a dwelling. Be aware what HMRC may consider to be a ‘dwelling’ may differ from what a lay person may regard as being suitable for use as dwelling. However, this approach may help the taxpayer to benefit from the lower residential rates applying until 31 March 2021.

Additional homes

A 3% supplement applies to second and subsequent residential properties. As this is applied to the reduced residential rates, those looking to buy a second home or an investment property in England or Northern Ireland will also benefit from the cut.

Winners and losers

Whilst the impact of the changes are yet to be felt,  the overall impact of the SDLT cut is seemingly pushing up house prices to the extent that any stamp duty savings may not make a difference in reality. However, there are some winners.

First-time buyers

Prior to the reduction, a higher threshold of £300,000 applied to first-time buyers, as long as the purchase price was not more than £500,000. While some first time buyers have lost their advantage, those paying less than £300,000 are unaffected by the reduction, but those buying residential properties costing more than £300,000 will benefit from the reduction.

On the surface the changes look like fantastic news for this group, especially in London where the average first home costs £415,000, meaning buyers are in line for a potential tax saving of £5,750.

However, most mortgage lenders will not currently lend more than 80 per cent of the purchase price, meaning the bulk of first-time buyers will need to stump up a 20 per cent deposit, rather than the 10 or five per cent required before the pandemic – a gap which may not be bridged by any stamp duty savings.

Home movers

The most significant saving will be for home movers who previously would have had to pay stamp duty starting from £125,000. They could now save a maximum of £15,000 on a property costing £500,000 or more.

Mixed-use properties

Properties that are both residential and non-residential (for example where there is both a residential and a business element) pay SDLT at the non-residential rates. This is usually beneficial but means such properties will not benefit from the temporary increase in the residential SDLT threshold.

Properties in Scotland and Wales

The residential threshold for land and buildings transaction tax in Scotland is increased 145,000 to £250,000 from 15 July 2020 until 31 March 2021 and the residential threshold for land transaction tax in Wales is increased from £180,000 to £250,000 from 27 July 2020 until 31 March 2021. However, unlike the rest of the UK, purchasers of additional properties in Wales do not benefit from the increase; the supplement is applied to the rates applying prior to 27 July 2020.

If you are thinking of buying or selling a house and you need help with Stamp Duty or Capital Gains Tax, call us on 0114 272 4984 or email info@shipleystax.com.

AT SHIPLEYS TAX we have been seeing a rise in so called “nudge” letters from HMRC enquiring about offshore matters. If you have received this letter, why have you got it? What should you do and not do? In today’s tax note we look at how an innocent letter can turn nasty.

What’s a nudge letter?

Since 2017, HMRC has been sending letters to UK individuals who they have identified as having received income or gains from overseas accounts or investments that they may have to pay UK tax on. These are prompted by information HMRC receives from overseas tax authorities under Automatic Exchange of Information (AEOI) agreements and more recently, as a result of the Common Reporting Standard (CRS).

Why?

HMRC’s aim in sending these letters is to:

• nudge or prompt taxpayers to review their tax returns to check that they are complete and correct;
• encourage those who need to rectify mistakes to make voluntary disclosures to HMRC;
• encourage all recipients to update HMRC on whether their tax position is up to date to enable.

So what’s in these nudge letters?

Broadly, the July 2020 version of the letter states that HMRC compared the information received under the above information exchange with the individual’s tax record and tax return(s) before sending the letter. It says that HMRC believes that the individual may not have paid the right amount of UK tax. Crucially, the new form includes a “certificate of tax position” form which needs addressing.

Key points:

• The letter is not speculative; HMRC is taking a risk-based approach and only contacting taxpayers where they are unable to reconcile the figures received under information exchange agreements to tax records and tax returns.

• They acknowledge that there may be a reasonable explanation for this but the individual should review their affairs and let HMRC know if they need to correct their tax position.

• They recommend getting professional tax advice if the person is not sure whether they have declared all their overseas income or gains which are taxable in the UK to HMRC.

• They warn recipients that HMRC regularly carries out checks and that if HMRC later finds out that the individual did not tell HMRC everything, HMRC will view this very seriously and could carry out an investigation which could result in significant penalties or prosecution.

• All the letters include a “certificate of tax position” form which HMRC asks the individual to complete and return whether they have additional tax liabilities to disclose or not. We understand that one reason why HMRC uses the “certificate of tax position” is because it helps them minimise the number of “no response” cases they would otherwise need to follow up.

What should you do if you have received one of these letters?

It is important not to panic. But do not ignore the letter altogether either. It is imperative the right course of action is taken to minimise any fall out and not to put the proverbial “foot in it”.

There is official guidance provided on handling these letters – in summary these point out:

• The certificates provided by HMRC should not be completed in most cases, because they are unlimited to time and amounts – i.e. they apply to all tax years and for any size of mistake;
• Instead, letters are an acceptable way to respond to HMRC;
• Care must be taken to check the client’s actual position (i.e. check the facts) as a first step.
• Get specialist professional advice!

Some important points to bear in mind when dealing with nudge letters:

• HMRC does not issue such letters to all taxpayers whose returns may be wrong or have not been submitted – it may instead open an enquiry or a more serious tax investigation.
• Just because HMRC sent a letter does not mean that the person’s tax returns are wrong – there may be an innocent explanation.
• HMRC could open a criminal investigation with a view to prosecution for mistakes involving offshore matters that arise as a result of careless (as well as deliberate) behaviour. Alternatively, the taxpayer may face tax-geared penalties of up to 300% (plus asset-based penalties) due to a combination of Failure to Correct penalties and other penalties for offshore matters/transfers.

The letters also advise using what is known as the “Worldwide Disclosure Facility” to rectify tax mistakes for earlier years. However, this may not be appropriate for some and alternatives are available, including making a voluntary disclosure. Bespoke tax specialist advice is imperative.

If you need help with the above please contact Shipleys Tax’s Investigation Team for further information, or for assistance in dealing with a nudge letter or making a voluntary disclosure on 0114 272 4984 or email info@shipleystax.com.

IN THE CURRENT economic climate, companies are sadly going bust. A frequently asked but often misunderstood so called tax planning idea doing the rounds involves paying £30K “tax-free” whilst the company undergoes voluntary liquidation.

At Shipeys Tax we consider the viability of this in the tax note below. Needless to say, never take tax advice from someone around a dinner table (unless of course he/she is an experienced tax adviser!).

Basics

Due to the unfortunate impact of COVID-19 and lack of demand, a sole director and shareholder of an hitherto successful company personal company has decided to put the company into voluntary liquidation. As part of the process the director decides to pay herself a redundancy or termination payment from the limited company as she has heard that such pay-outs are tax-free.

What is a redundancy/termination payment?

Broadly, this refers any payment to an employee for compensation for loss of employment that is not contractual, non-customary, related earnings or to the notice period. If it qualifies then the payment can potentially benefit from a statutory £30,000 exemption to tax and NIC. Nice.

Can a sole director shareholder receive a tax-free redundancy or termination payment from the company?

Generally speaking, in some circumstances it is possible for a director to receive termination payments that fall within the exemption. However, the old adage that the position should be reviewed on a case by case basis applies. Whilst the tax treatment of qualifying termination payments are quite well established, those involving sole director shareholders are somewhat trickier to navigate.

To employ or not to employ?

Firstly, it is important to identify whether the sole director is employed by the company. To receive a tax-free statutory redundancy payment, a worker must have an employment contract with their employer

Evidence that could point the employment status includes the existence of an employment contract, payment of salary, duties etc which point towards employment.

The payment conundrum

Assuming the sole director is clearly employed by the company, it is then necessary to determine to what extent the payments relate to the termination of the client’s employment rather than their position as shareholder. Was the payment in actual fact compensation for loss of office or was it an extraction of “profits”, i.e. a dividend distribution? HMRC will obviously argue the latter, especially for one-man band companies where no other employees have been made redundant and paid termination payments. In other cases, payments to those close to retirement can be classed as part of the package an amount that arises from what is known as an employer-financed retirement benefits scheme (EFRB). Essentially, this is an unregistered pension scheme. If there is a payment that HMRC deems to be an EFRB, it will be fully taxable.

Self (de)termination

Secondly, even if a sole director satisfies the first condition and has clear evidence of  employment, there is another issue to consider: as the owner and director of the business making themselves redundant, they are effectively making the decision to cease trading and leave, and so fail the condition that they cannot resign or leave of their own volition.

An employee has to be made redundant by their “employer” – they have no choice in whether their role continues to exist.

In the case of a sole director/owner employee who is also a company director controlling the company, choosing to make themselves redundant is the same as choosing to end the employment. This will most likely nullify the redundancy argument. In addition, HMRC would also challenge a sole director company making a corporation tax deduction for their own redundancy in the company accounts, the nature of the payment not being deemed to be for the benefit of the trade.

Terminus

However, it is possible some termination payments may fall within the £30,000 exemption, provided they are not subject to tax under any other part of the legislation such as earning or benefits. The circumstances in which can occur are very few and far between and you would need specialist tax advice to help you navigate the tax traps. This is a fairly complex area as evidenced above and the facts of any case will need to be reviewed to determine whether any termination payments for the director would fall within the £30,000 exemption, but with the right set of circumstances some relief may be available.

At Shipleys Tax we have a team of experts who can advise on the above and whether a redundancy payment can be tax-free. Contact us on 0114 272 4984 or email info@shipleystax.com.