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priv
ate
clie
nt Aut
umn
2009
Doing it for yourself – starting your own business
Jumping ship? – an update on residency
Investment housekeeping – are you being tax efficient?
Principal private residence (PPR) relief – the rules on second homes
Keeping it in the family – do you need a trust, a company or a partnership?
NDO: as easy as ABC?
Wrapped-up
2
ContentsDoing it for yourself – starting your own business 3
Jumping ship? – an update on residency 4
Investment housekeeping – are you being tax efficient? 6
Principal private residence (PPR) relief – the rules on second homes 8
Keeping it in the family – do you need a trust, a company or a partnership? 10
NDO: as easy as ABC? 12
Wrapped-up 14
2
Welcome to the autumn edition of Private Client.
As promised, we provide a short update on some of the changes announced in April’s Budget. The Finance Bill received Royal Assent on 21 July 2009, creating Finance Act 2009.
The two main points of concern for private clients are the change to a 50% top rate of tax for those earning £150,000 or more and the changes to pensions tax relief. The 50% rate will become effective from April of 2010.
From 22 April 2009 until 5 April 2011, pension contribution tax relief is restricted for those with total annual incomes of £150,000 or more (the examination of total annual income is in the current tax year and the previous two tax years). There are detailed rules concerning the extent to which pension savings can continue to be made with the benefit of full tax relief – with any saving in excess of this incurring a tax charge of 20% in 2009/10 and potentially 30% in 2010/11. The Government will consult on the rules for pension contribution tax relief from 6 April 2011.
September sees the start of HM Revenue & Customs’ (HMRC) ‘new disclosure opportunity’ (NDO) for those holding undisclosed off-shore bank accounts where, for a limited period, HMRC will be accepting disclosures without the risk of prosecution. In previous years this type of arrangement has been adopted by a number of individuals – but it is not all bad news for taxpayers with an often reduced exposure to penalties. More information on this arrangement can be found on page 13 of this issue.
The reduced rate of VAT which was implemented around a year ago will be ending as of 1 January 2010, when we see a return to the standard 17.5% rate. The reduction to 15% was always planned by the Chancellor as a temporary measure, but there are rumblings of discontent in both the political and business worlds regarding the administration involved in the change and the increased costs to most consumer items.
Whilst the change does not appear to have had a big impact on spending patterns, those planning a major purchase in the near future may be encouraged to accelerate their spending.
The main political parties are still at loggerheads over any proposed changes to the threshold for inheritance tax (IHT). The Conservative Party has confirmed again recently that it intends to raise the threshold to estates valued at over £1 million, a move which the party claims will limit IHT only to very high net worth individuals. The Labour Party, however, view any such move as a ‘giveaway to the wealthiest few’, so the point is still contentious. We await with interest the parties’ commitment on tax policy as the election approaches. As always we welcome any feedback on the articles in this issue.
Regards
Clive Mackintosh
Editorial
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Doing it for yourself – starting your own business
Generally, when we are having this discussion with clients there are four structures we consider:
limited company;•
partnership;•
sole trader; and•
limited liability partnership•
Whilst tax can be a key driver, it is also important to consider other factors such as limited liability, annual administration and how any structure might look to customers. The forthcoming introduction of the 50% income tax rate will also make the decision a bit more complicated.
Tax considerations
Of the four options, the limited company offers some of the biggest benefits from a tax perspective as it is a separate entity for tax purposes – any profits of the company are taxed within the company at a rate varying from 21% to 28%, depending on the level of profitability. The other three structures are such that trading profits are taxed as your income, with the potential for a rate of up to 50% (51% with National Insurance), assuming the proposed tax rate increase comes into force from 2010 as planned. It should be remembered that although a company gives an initial lower rate of tax for the profits, it will then suffer additional tax on extraction of those profits; either as a dividend or bonus, giving effective tax rates of up to 54% to 56.55%. Although these combined rates are higher, with the company you can manage the timing of any tax due and there can also be more efficient means of extracting profits, for example if the company is sold.
Managing your risk
As their names suggest, limited companies and limited liability partnerships (LLP), give you protection and a limit to your potential liability should the worst happen. A simple partnership or sole trader structure gives the potential for an unlimited liability and, hence, could put other assets at risk. It is also worth noting that as a partner in a simple partnership, you can be liable for the other partners’ actions.
So limited liability must be the way forward, surely? Potentially, the answer is yes, but as they have limited liability there are added administrative requirements. With LLPs and limited companies you have to file your annual accounts at Companies House, so your business performance will be publicly available. The company, however, will have slightly more administration, with filing requirements such as annual returns, notification of changes in shareholders etc.
Whilst the administration will ultimately lead to more costs, an LLP or company will give added security to you and potential customers. In fact, some customers or government bodies will only deal with companies.
Which one is right for you?
As you can see, there are lots of different factors to consider when choosing a structure, and it might be that you can actually use a mixture of the options when deciding on the structure that best suits your needs. It is important to consider as many factors as possible when making a decision, and wherever possible try not to let one issue drive the structure. It is, however, definitely worth investing the time now to get it right. Once you have the right structure, you can concentrate fully on the business; after all you are the boss!
Working for yourself can be an attractive proposition; after all, you will be the boss. Having made the important decision to set up your business, you then need to think about how to structure it.
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Jumping ship? – an update on residency
People often think that ‘going abroad for tax purposes’ is simply a matter of counting days, but that is a myth that needs dispelling.
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Where you are resident is not defined in legislation, but by case law and HM Revenue & Customs (HMRC) practice. Until recently, most of the residence cases dated back to the beginning of the twentieth century and it was often difficult to relate them to modern international lifestyles. HMRC decided a few years ago that the case law needed to be updated and has now taken five cases to the Special Commissioners and beyond. At the moment the score is 5:0 to HMRC: i.e. in all of the cases, the taxpayer has been found to be UK resident. Given this recent success, HMRC can be expected to look at all claims to be non-resident in some detail.
It is important to understand that just because you become resident in another country, you do not necessarily cease to be resident in the UK. It is perfectly possible to be resident in two (or more) countries at the same time. If you wish to cease to be UK resident the first requirement is that you must leave the UK permanently or indefinitely (for at least three years) either to work, or for some other reason. When you leave you should complete a form P85 for HMRC. This form provides information about your reasons for leaving, future intentions, lifestyle and income sources. HMRC may ask further questions to check that you have genuinely left the UK. It will look for sufficient evidence to substantiate a clean break, and unless you can provide suitable proof, HMRC will probably say you are still resident in the UK.
If you are leaving the UK to work abroad full-time for at least a full tax year, the rules are a little more relaxed and you should be regarded as non-resident from the date you leave.
HMRC guidance on leaving the UK is contained in the recently published booklet, HMRC 6. It includes this comment, ‘If you still have property in the UK which you can use after you leave, we might want you to explain why you are retaining that property when you say you have left the UK.’ This sentence is strikingly heavy-handed, but is indicative of the current approach. Other areas we have seen raised in residence enquiries include:
where your family lives and where school age children are •educated;
where you work or your business activities are carried out;•
how frequent your visits are to the UK and what their •purpose is;
where your banking, savings and investment activities are •based; and
where other lifestyle factors place you: clubs, doctors and •dentists, registration to vote etc.
This information will paint a picture that will enable HMRC to take a view on whether you have left the UK. This is not an exact science and anyone wanting to ensure that their departure is effective for tax purposes should take detailed advice tailored to their own particular personal circumstances and then follow it. The recent tax cases mentioned above illustrate the depth into
which HMRC will delve and what they will look at. For example, in the case Barrett v RCC (SpC 639) the Special Commissioner commented (amongst other things) on the failure by Mr Barrett to provide evidence (air ticket) to support his assertion that he had left the UK, and evidence from bank statements that cash had been withdrawn from a machine near his UK house on a day when he had said he was abroad.
Having successfully left the UK you are then allowed to make return visits without becoming resident here, provided that you spend an average of 90 days or fewer here a year over the most recent four tax years. However, if you spend 183 days or more in the UK in a tax year you will always be regarded as resident here without exception.
A day in the UK for these purposes is a day at the end of which you are here, though it may not count if you are simply passing through the UK in transit between two other countries.
Individuals who are not UK resident are still taxable on some kinds of UK income. Income from UK trades and property will always be taxable here. UK dividend income should suffer no additional tax and you can avoid tax on bank interest if you arrange with the bank to have it paid gross. Broadly, capital gains arising after the tax year you left should not be taxable, provided that you do not resume UK residence within five tax years.
Even if you are no longer taxable in the UK, you need to look at what you will be paying in the country you move to. It would be a shame to flee the UK system to find that taxes in the other country are higher.
If you are resident in more than one country there are rules governing how the taxing rights on income, gains etc. are split between them. Often this will be dealt with under a double tax agreement (DTA), but particularly with tax havens, there may be no agreement. The UK has DTAs with Jersey, Guernsey and the Isle of Man. These deal with income taxes, but not capital gains taxes, as they are not taxed in these islands. Unsurprisingly, there is no agreement with Monaco or Liechtenstein. While DTAs differ, there are some patterns; for example, most agreements will give the primary taxing rights over rental income to the country where the property is. The other country may then be able to tax the rental profits too, but with an offset for the tax paid in the first country. You generally end up paying whichever is the higher tax rate of the two countries.
Finally, becoming non-UK resident does not mean ceasing to be domiciled in the UK. You will probably still be subject to UK inheritance tax on your worldwide estate, but that is a topic for another article.
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Against the current economic backdrop of low interest rates, deflation – at least in the short term – and the spectre of increased taxation, it is vital to review your finances to eke out returns, where they exist, and position your assets for the eventual return to economic growth.
Review shareholdings
Whilst it may be painful to confront the impact of the recession on your share portfolio, the current depressed values may offer opportunities to lower the future tax charge. You may be loathe to commit further cash to use your individual savings account (ISA) allowance (which from October 2009 increases to £10,200 for those over the age of 50. Everyone else must wait until April 2010), but you may wish to transfer existing shareholdings to maximise your annual investment. Transferring non-ISA holdings into an ISA wrapper usually gives rise to a potential charge to capital gains tax, so it is sensible to consider this when values are depressed and doing so may result in a capital loss which can be carried forward and offset against gains in the future.
It could be advisable to shelter those assets which have most to benefit from an economic recovery within your ISA, sheltering the biggest potential gains in a tax-free wrapper.
ISA allowances are generous tax vehicles, when correctly harnessed, and over time can build a considerable portfolio of tax advantaged capital. If you save the maximum allowance of £10,200 each April for 15 years, and the fund returns 5% per annum, you will amass a portfolio of £231,108. If you were a higher rate taxpayer over this period, saved directly into shares and liquidated the portfolio after 15 years, the fund would only be worth £203,804.1
1 Assumes half of the return is income taxable at 42.5% and the gain is ultimately taxed at 18%.
Investment housekeeping – are you being tax efficient?
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A portfolio within an ISA can provide a very useful tax advantaged income in retirement. Depending on your marginal rate of tax, this can reduce the return that your portfolio has to achieve by up to 50% in order to offer the same level of net investment income.
ISA allowances are not able to be carried forward, and you should ensure that you make the most of this allowance during the course of the year. Once assets are sheltered within your ISA allowance they may be transferred to new providers, or shares traded without losing the tax protected status.
Ownership of assets
The change in tax rules from April 2010, which will increase the top rate of taxation to 50%, combined with the removal of personal allowances for all individuals whose income exceeds £100,000 per annum, has created a new tier of thresholds to plan for. An individual who earns £100,000 per annum, but also receives £5,000 of gross interest, will suffer a £2,500 reduction in their personal allowance and additional tax from April 2010 of £1,000 per annum. This equates to a marginal rate of tax of 60%. This would reduce a typical 2.5% interest rate on savings to an effective net rate of 1.0%. Where possible, you should review your assets to see whether those earning a high income can be passed to a lower earning spouse.
Even if you and your spouse may both currently be classified as higher rate tax payers, the introduction of new thresholds at £100,000 and £150,000 mean that it may still be beneficial to transfer ownership of income yielding assets between spouses – although you should remember these gifts must be outright and unconditional.
As you can see, planning your allowances and investment housekeeping in a sensible fashion will stand you in good stead, as and when economic growth does return.
Principal private residence (PPR) relief – the rules on second homes
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The recent MPs’ expenses scandal has brought into focus a long-established and legitimate means of mitigating capital gains tax (CGT) on properties used as a main residence.
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The rules relating to principal private residences have evolved over many years and are designed to cover many common situations encountered by ordinary taxpayers, where it would appear harsh to deny relief based on personal circumstances. They extend the relief, for instance:
to people who are required to work •either abroad or elsewhere in the UK;
to give these individuals and others •time to sell, perhaps in time of recession; and
to enable individuals who have more •than one property to elect to which property the relief should be due.
Basic rules
Gains have long been exempt on the sale of a single property which had been used throughout as an individual’s main residence, and where the primary purpose of purchase was not an early disposal at a profit. Where a house has not been owner-occupied throughout the period of ownership, part of the gains arising is chargeable and part is exempt. The exempt gain is calculated by time apportioning the gain between periods of occupation and non-occupation (only periods since 31 March 1982 being included in the calculation).
There are additional rules, surrounding the designation of property where two or more properties are owned (the relief extends to adjacent buildings and gardens, and grounds up to 0.5 of a hectare, or such larger area as is required for reasonable enjoyment of the property). These rules are intended to enable a taxpayer, where he/she has two or more properties which are used as residences, to elect which property the relief applies to.
Periods of absence deemed to be periods of occupation
Some periods of absence are in fact deemed to be periods for occupation, provided that the house was actually occupied both before and afterwards, and no other residence qualified for relief during the period of absence. These periods are:
any periods, no matter how long, •during which the owner or his spouse were employed abroad;
any period or periods of absence •which do not, in total, amount to more than three years; and
any period or periods of absence •totalling not more than four years, where the owner or his spouse was unable to occupy the property by virtue
of the location of his work, or because he was required to be elsewhere in order to carry out the duties of his employment.
HM Revenue & Customs (HMRC) does not seek to impose a minimum period when considering whether a residence has been occupied. It is the quality of occupation, rather than the length, which is important.
By concession, HMRC is prepared to waive the requirement to occupy the home after a period of absence, where the individual who has worked abroad or elsewhere in the UK is unable to resume occupation because he is required to work elsewhere.
A similar concession applies to the first twelve months (in exceptional circumstances this can be extended to two years), where an individual buys a property and arranges alterations or redecorations, providing he occupies the property once the works are completed.
The last 36 months of ownership are always treated as a period of occupation, providing that the property at some stage was the individual’s PPR.
Letting out all or part of the property
Where a property, or part of it, has been let as residential accommodation at any time during the period of ownership, the gain attributable to the period of letting (on a time apportionment basis) will be chargeable only to the extent that it exceeds the lower of:
the relief attributable to owner occupation; •
the gain arising during the let period; or•
£40,000. •
Operation of the rules
The interaction and operation of the above rules require detailed examination, but when combined and operated efficiently can provide a very beneficial (and perhaps at times unintended) tax treatment, particularly in times of high property inflation. We will look below more closely at ‘flipping’, as it has recently been described in the press.
Where a husband and wife live together, only one dwelling house may qualify for PPR relief. If an individual has more than one residence he has the ability to nominate, within two years, which is to be regarded as his main residence. This nomination may be varied at a later date. However, for a nomination to be valid, it is necessary that the individual does actually reside in both residences. Unfortunately, the legislation does not provide a definition
for dwelling house or residence and they both, therefore, take their customary meaning supported by case law.
It should be noted that a tenancy, including an assured shorthold tenancy, can be considered a residence and, therefore, consideration should be given to making a nomination in cases even where an individual only has beneficial ownership in one property. However, for example, where an individual lives with family/friends for part of the week, or stays in a hotel, there is no need for him to make an election – HMRC will consider him as having only one residence.
The rules on ‘flipping’
‘Flipping’ is essentially foregoing a short period of CGT relief on your main home, to get relief on 36 months of gain on a second property. So, for example; you have had two residences for many years, and have submitted a valid notice nominating one as your main residence but plan to sell the other and realise a capital gain. In order to obtain some relief in respect of that gain you would submit a variation to your original notice, such that both properties have been your principle private residence at some point during your ownership, and as a result enabling a tax exemption for 36 months of ownership.
Despite the very beneficial, albeit possibly unintended, tax treatment associated with ‘flipping’, HMRC have accepted the validity of this planning for many years. Until the recent controversy surrounding ministerial expenses, it was seen as a relatively standard part of tax planning for individuals with two or more houses and there was no reason to believe that this would be altered.
It is fairly clear that although the use of the rules is accepted practice, the involvement of MPs, combined with other complexities such as claiming of second property expenses, has driven this topic to the forefront of political debate.
In an effort to counter public concern over the unpalatable nature of ministerial expenses, it is possible that this relatively uncontroversial piece of tax planning may now have a limited shelf life and ordinary taxpayers could unwittingly lose out, if the rules are changed. If there are any changes to the tax law in this area we would hope they are well considered and do not deny relief to those individuals for whom they were originally intended.
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Because of this flexibility trusts have played an important role in family tax planning, including income tax (IT), capital gains tax (CGT) and inheritance tax (IHT).
Finance Act 2006 introduced major changes in the IHT treatment of trusts, with the favourable ‘accumulation and maintenance’ (often known as ‘Grandparents settlements’) regime being abolished and a lifetime IHT charge, currently 20%, being introduced on all funds entering any type of trust.
The 2009 Budget brought further bad news for trusts, this time with regard to income tax. Whilst trusts have previously had quite favourable IT and CGT rates, when compared to individuals, in recent years these rates have been aligned. Finance Act 2009, however, goes one step further. From 6 April 2010, individuals with a total income of over £150,000 will pay income tax at a marginal rate of 50%. From that date, all discretionary trusts, irrespective of their level of income, will pay this new 50% tax rate.
Alternative structures
The changes announced in the Budget have led to an interest in other legal forms which may be able to replicate some, or all, of the advantages of trusts, but without the disadvantages. The two main structures of interest here are ‘family investment companies’ (FICs) and ‘family limited partnerships’ (FLPs).
Family investment company
There are traps for the unwary when setting up a FIC, so caution is recommended. The addition of property, the gifting of shares around family members and certain subsequent lifetime transactions all need care from an IHT standpoint. In particular, the set-up needs to be carried out in a particular sequence, if you are to avoid an immediate IHT charge. If this process is carried out correctly, however, it is possible to establish a family limited company with a broad range and number of family shareholders, without an immediate IHT charge.
A FIC is likely to pay corporation tax on its profits at 28% (as an investment company), and profits for this purpose will include capital gains.
A rate of 28% on your income initially looks attractive, when compared to a potential post 5 April 2010 trust rate of 50%. The 28% CGT rate looks somewhat less attractive when compared to the trust rate of 18%, but corporate bodies will still get indexation relief to reduce the gain chargeable. However, when profits are distributed to the shareholders (beneficiaries), they will pay income tax on their dividends at whatever is their own personal rate. This results in a double tax charge on profits – once on receipt by the company and again on distribution to the shareholder. After April 2010, this could potentially raise the total tax charge to 54% for a high income recipient. FICs are, therefore, best suited to situations where income and capital profits are to be accumulated over the long term, when the benefits of reinvestment within the company will outweigh the ‘double charge’ on eventual distribution.
Many individuals and families have found in the past that trusts were a useful tool for structuring their wealth. Trusts enable assets to be taken out of personal ownership without them immediately becoming owned by the intended recipients (the beneficiaries). Instead, the assets are held by trustees under the terms of the trust, for the long-term benefit of those beneficiaries. This can include, for example, giving beneficiaries access to the income of the property and delaying the transfer of full ownership in the property until a certain age is reached, or certain conditions are fulfilled.
Keeping it in the family – do you need a trust, a company or a partnership?
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Family limited partnership
For FLPs, the applicable income and capital gains tax rate is that of the partners within the partnership, in accordance with their capital and income profit sharing ratios as specified in the partnership deed. Because the partnership is essentially ‘tax transparent’ the FLP will offer you few advantages if you fall into the 50% tax bracket.
FLPs advantage lies in the way initial funds can enter without an upfront inheritance tax charge. The transfers are usually PETs, as they are treated as gifts to the individual partners, and there are no periodic IHT charges.
One bear trap to look out for is whether the FLP is a ‘collective investment scheme’ under Financial Services and Market Act 2000 – if it is, this will require the appointment of a Financial Services Authority authorised operator and investment advisor.
Long live trusts?
It’s worth remembering that the tax disadvantages of trusts may be more
apparent than real. The IHT entry and periodic charges may not apply where certain assets (such as private company shares) qualifying for 100% IHT business property relief are involved. There may also be other ways to enter the trust without IHT (normal gifts out of income, special planning etc).
As regards the 50% income tax rate from 6 April 2010, for discretionary trusts one relatively simple way for you to manage this is by granting beneficiaries ‘life interests’ in the income. The income will then be taxed at their own tax rates, which may not necessarily be 50%. This provides an ideal opportunity to review your existing financial structures in order to maximise the potential of the trust.
Conclusion
So how do trusts measure up against FICs and FLPs in real terms? In many cases it will be appropriate for you to use more than one structure for different asset types or situations. Indeed, in some cases other structures may be appropriate.
Trusts: Still important and very flexible, •especially if IHT entry charge can be
avoided and 50% income tax can be mitigated.
FICs: Good where trust use is difficult •due to IHT entry charge and the intention is to accumulate funds long term – particularly where most beneficiaries are likely to suffer 50% income tax after April 2010.
FLPs: Good for situations where •control of the recipient of income, without immediate capital access, is the major requirement. Also enables full ‘management control’ to be retained with the general partner. Is perhaps the best option where a number of the ‘beneficiaries’ are likely to have income levels (including their FLP income) below the £150,000 threshold for the 50% tax rate.
It’s clear that you will need comprehensive advice to choose the right investment vehicle and to operate it effectively. Trusts have their advantages, but understanding the benefits of FICs and FLPs will give you alternative options to consider when reviewing your wealth management structure.
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Stephen Camm and Jessica McLellan explain who should be considering a disclosure and the process for doing so.
HMRC has recently announced the new disclosure opportunity to encourage taxpayers to tell HMRC about UK tax liabilities arising from offshore assets. This follows on from the success of their offshore disclosure facility in 2007-2008, which brought in approximately 40,000 cases, and in turn gave rise to £400m of additional revenue. This news comes as HMRC pushes for further decisions from the Special Commissioner to compel banks and other financial institutions to provide information about those UK resident customers who hold offshore bank accounts – and, therefore, potentially undisclosed tax liabilities. There is no doubt that this remains an area to which HMRC is dedicating investigative resource and will inevitably lead to intrusive enquires and potential prosecutions for those who do not come clean.
The new disclosure opportunity will be open to taxpayers who hold, or have held, offshore assets (including bank accounts) that have produced taxable income/profits, but have not been disclosed to HMRC, either deliberately or accidentally. Although the introduction of the European Savings Tax Directive in 2005 may mean that bank account interest in recent years has been accounted for, HMRC is interested in undisclosed liabilities potentially going back as far as 1989 and certainly back to 2003.
Despite being targeted at offshore assets, any disclosure must also include undeclared UK tax liabilities. HMRC is offering a low penalty rate of 10% for those who were not aware of the original offshore disclosure facility and a 20% penalty for those who received letters from HMRC as part of the first amnesty, but chose not to come forward. There is a de minimis level of tax due of £1,000, below which a penalty will not be charged.
HMRC is offering a three month window from 1 September to 30 November 2009 for people to register their intention to disclose and obtain a unique reference number. Once this notification has been given, actual disclosures can be submitted on paper between September 2009 and January 2010, or online between October 2009 and 12 March 2010. Tax agents can notify and make disclosures on their clients’ behalf.
In order to be submitted, a disclosure needs to be accompanied by payment for the full amount of tax, interest and penalties, as well as a signed certificate confirming that the disclosure is correct and complete. Thereafter, HMRC will risk assess the disclosures by matching the information provided with the data the Revenue hold and continue to gather. HMRC will undoubtedly challenge disclosures where contradictory evidence is found.
What should you do if you think you might be affected?It can take some time to gather the information required to support a disclosure; obtaining bank statements and information from offshore institutions can be a slow process, so early action is recommended to those who have something to tell HMRC. Determining the right liabilities, interest and penalties is a job for experts, particularly if there are complex issues such as domicile and residency involved. There are no prizes for overpaying as a result of miscalculating liabilities in the rush to disclose.
For more information relating to the new disclosure opportunity, please call the PricewaterhouseCoopers helpline on 0800 3288215.
[email protected] [email protected]
HMRC has announced a ‘new disclosure opportunity’ (NDO) for taxpayers with offshore assets, as the Special Commissioner forces banks to provide further offshore account information.
NDO: as easy as ABC?
Wrapped-up
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This is one of those situations where there is both good and bad news!
The good news is that, in order to comply with EU law, the ‘furnished holiday letting’ (FHL) rules which used to apply only to UK properties have been extended to accommodation in the European Economic Area (EEA). This is subject to your arrangements satisfying the general FHL conditions during a 12-month period: the letting must be carried out on a commercial basis, be available for at least 140 days, and actually be let on short-term lets for at least 70 days.
Falling within the FHL conditions means that the holiday letting is treated as if it were a trade for a number of purposes, including loss relief, so that you could set your loss against other sources of income and gains. In addition, you could claim for similar treatment for losses incurred in tax years since 2003/04.
The bad news is that, presumably, to prevent the loss of revenue which might otherwise arise from loss relief claims on overseas property letting, the FHL provisions will be repealed altogether from 2010/11. This will apply to properties in the EEA and in the UK and, from that date, trading treatment will only be available if the letting would qualify under general principles.
I let out my holiday home in Portugal and generally make a loss. I have heard that the 2009 Budget means I can get tax relief. Is that right?
Although there has been a lot of attention on the headline-grabbing changes to personal tax rates and allowances, other proposals issued on Budget Day can have an impact on private clients. Two such points, both around potential claims for foreign property, are picked up in this edition of ‘Wrapped-up’.
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Assuming that you are domiciled or deemed domiciled in the UK, inheritance tax (IHT) is calculated by reference to your worldwide estate, so the fact that you own land outside the UK does not mean that it is excluded property for IHT purposes.
Whereas, before Budget Day, qualifying agricultural land in the UK could attract agricultural property relief (APR) or woodland relief (WR), you could not claim either relief for foreign land. Following pressure from the European Commission to end discriminatory IHT provisions, the Chancellor announced that the availability of APR and WR would be extended to agricultural property and woodlands situated in the European Economic Area (EEA). Relief can be claimed from 22 April 2009 and, in addition, a claim can be made where IHT was actually due or paid on or after 23 April 2003. A claim for repayment of IHT can normally be made up to six years after the tax was paid, but the proposed legislation allows a claim to extend the time limit for tax paid in
2003/04 until 21 April 2010. A claim for WR must be made by executors within two years of the death of the testator. Again claims will be accepted up to 21 April 2010.
The extension also applies to certain capital gains tax (CGT) reliefs. If you own qualifying foreign property, new provisions allow a hold-over relief claim if a gain arises or had arisen on the transfer of qualifying property. Claims for hold-over relief for 2003/04 will need to be made by 31 January 2010 and, following some changes to time limits generally, claims for 2004/05 and 2005/06 must be made before 1 April 2010 and 2006/07 by 5 April 2011.
Claims may be appropriate in respect of transfers on death, as well as transfer to trusts, or where a potentially exempt transfer became a chargeable transfer as a consequence of the donor’s death within seven years of the date of the gift.
I understand that the Budget has given inheritance tax relief to overseas agricultural land but I thought that overseas land didn’t form part of my estate anyway?
If you have a question that you would like answered in the next issue, please email it to [email protected] or send it to: Emma Thomas, PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
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Contacts
Editor: Sian Steele Tel: 01223 552226 [email protected]
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act on the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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Designed by studioec4 19951 (08/09).
Regional Private Client contacts:
LondonClive Mackintosh: 020 7804 5614 [email protected]
Leonie Kerswill: 020 7213 8588 [email protected]
SouthRay Thomas: 0118 938 3278 [email protected]
ScotlandValerie Smart: 0131 260 4497 [email protected]
North EastKatherine Bullock: 0113 289 4268 [email protected]
Martin Pickering: 01482 584089 [email protected]
Carol Chleboun: 0191 269 4054 [email protected]
North WestGillian Banks: 0161 245 2922 [email protected]
Lee Blackshaw: 0161 247 4013 [email protected]
EastSian Steele: 01223 552226 [email protected]
MidlandsGary Telford: 0121 265 6507 [email protected]
Wales and WestRobert Brown: 0117 923 4228 [email protected]
Tracey Bentham: 0117 928 1194 [email protected]
Northern IrelandNigel Anketell: 028 9041 5382 [email protected]
Isle of ManGeorge Sharpe: 01624 689689 [email protected]
Channel IslandsLynsey Reeve: 01534 838326 [email protected]
Investment advisoryDarrel Poletyllo: 020 7212 5272 [email protected]
Lindsay Todd: 028 9041 5540 [email protected]
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