Inheritance tax to be simplified

The Office of Tax Simplification (OTS) have undertaken a detailed review of Inheritance Tax (IHT), which is perceived by many as a complicated tax. The government normally takes account of OTS recommendations and their report is likely to lead to future changes to the rules. We will keep you posted as the changes may necessitate amending your will or further planning to pass on your wealth.

There are also numerous misconceptions about how the tax operates, particularly in connection with gifts during someone’s lifetime. One of the proposed changes is to shorten the period for lifetime gifts to be exempt from 7 to 5 years. The OTS also recommended replacing the current £3,000 annual allowance, marriage allowances and the exemption for regular gifts out of income with a £25,000 personal allowance each year.

NO TAX FREE CGT UPLIFT ON DEATH

Although the OTS were tasked with simplifying inheritance tax, they also considered the interaction with CGT as many asset transfers potentially have both CGT and IHT implications. Currently there is no CGT on assets transferred on death and the recipient inherits the asset at its market value.

It has been suggested that the capital gains tax uplift on death distorts decision making relating to assets that benefit from an exemption from Inheritance Tax. Where an individual holds such an asset that has risen in value, and is considering transferring it during their life, they are often advised to retain it until death rather than giving it away during lifetime, because of the tax benefits.

Where a business is retained until death, any potential capital gains are wiped out and there is no Inheritance Tax to pay. This could lead to an asset being retained rather than being transferred to the next generation at the time that is right for the business.

We will again monitor the progress of this proposed change as it is likely to have significant implications on family business succession planning.

IHT RELIEF FOR BUSINESSES AND FARMS

There is currently a very generous 100% relief from inheritance tax for passing on businesses and farm land during lifetime and on death. The rationale for Business Property Relief (BPR) and Agricultural Property Relief (APR) is to enable businesses to be passed on without the need to sell off assets to pay the IHT due on the transfer.

Currently if a business is wholly or mainly for the purpose of investment, then it will not be eligible for BPR. This is not always straightforward to determine.  Many estates include both trading and non-trading business assets, and establishing whether this test is met can be difficult to establish. The ‘wholly or mainly’ test is generally considered to be a greater than 50% test and the OTS are suggesting that the test should be aligned with the much stricter 80:20 test that applies for CGT gift of business asset holdover and entrepreneurs’ relief. If introduced many more business transfers would be liable to IHT.

On the positive side the OTS have recommended that IHT business property relief should be extended to include Furnished Holiday Lettings aligning the tax treatment with that of Income Tax and CGT where they are treated as “trading” providing that certain conditions are met.

Furnished holiday letting business is not a business for inheritance tax (IHT) relief

holiday let

A furnished holiday letting business is treated as a trade for most tax purposes. For example, capital allowances are available on furniture, and CGT entrepreneurs’ relief is available on disposal of the business.

However, a recent tax case has determined that a holiday letting business in Cornwall did not qualify for inheritance tax business property relief.

Despite the provision of a range of services to customers, the judge agreed with HMRC that the business was wholly or mainly that of making or holding of investments and as such ineligible for any relief from inheritance tax.

Note that the restricted deduction for interest that started to apply to buy-to-let businesses from 6 April 2017 does not apply to furnished holiday lets.

There are special rules for a rental business to qualify as furnished holiday lettings, in particular the property must be available for letting for 210 days a year, and actually let for 105 days.

Contact us if you need help with the tax implications of your furnished holiday letting business.

Must own 5% of ordinary shares for capital gains tax entrepreneurs relief

In order for a shareholder to qualify for capital gains tax (CGT) entrepreneurs relief on the disposal of their shares, they must be an officer or employee of the company (or group) and hold 5% or more of the company’s ordinary share capital and voting rights for 12 months prior to the disposal. The company must also be a trading company or the holding company of a trading group throughout the same 12 month period.

In a recent tax case, the judge agreed with HM Revenue and Customs that in determining whether or not the shareholders held the required 5% of the ordinary share capital, all of the company’s shares should be considered except those with a fixed rate of dividend (preference shares). A lower court had previously decided that shares with no entitlement to dividends and voting rights could be disregarded.

3 things to know about tax when selling business assets

3 things to know about tax when selling business assets

As a business owner, you may at some point be in a position to dispose of a capital asset, such as a share of a business or a property for example. However, more often than not, we find business owners perplexed by the different legislation surrounding selling capital assets.

That’s why we’re on hand to advise you on the complex issues and have put together 3 things you need to know before selling a capital asset. Knowing this will help you, as the business owner, ensure that maximum relief is obtained were available.

1. Considering Capital Gains Tax

When you sell a business asset, capital gains tax needs to be considered. The gain or loss is calculated by taking the sale proceeds and deducting the purchase price.

There are different rates of capital gains tax. Currently, the standard rate is charged at 10%, with the higher rate of 20% being applied where the gain takes the individual into higher rates.

In addition to these rates, if the disposal is of residential property, then the rate is 18% for those within the basic rates tax band, and 28% for those who are within the higher rate of tax.

Capital Gains Tax can often be a complicated affair, and so it is highly recommended that you consult with a specialist advisor before proceeding with disposing of your asset.

2. Reducing your Tax Liability

It is important to try and reduce your tax liability when you are looking to dispose of an asset, and you can do so by looking at what tax reliefs are available.

For example, if the asset which has been disposed of is regarded as a business asset, then you may be able to claim Entrepreneurs’ Relief, which would, in turn, reduce the rate of tax to 10%. Careful planning is required to ensure all of the detailed conditions are met for ER, as the relief only applies to gains arising on a disposal of:

● A trading business of an individual or partner,
● Shares in a trading company, or holding company of a trading group,
● Assets used by a business or a company

Other reliefs may also be available and need to be considered such as private residence relief and lettings relief for residential property

Rollover relief may be available if the proceeds are reinvested or holdover relief may be claimed if assets have been gifted.

3. Tax Planning

You should always remember that with Capital Gains Tax, there won’t be any tax liability if the gain is less than £11,300 per individual. However, trustees will only have £5,650 as an annual exemption.

When exploring your options for tax planning, it is always important to remember the following:

● Transfers between spouses or civil partners can be made tax free.
● Involve your tax adviser at an early stage to ensure that the small print in any agreements does not result in the loss of any reliefs

Where can I go for more information?

Our team is on hand to provide you with assistance in disposing of your capital assets and you can contact us for support.

We’ve also put together a set of frequently asked questions for those who may have more queries about selling an asset and Capital Gains Tax.

If you’re still not sure, then let’s talk. Simply fill out a contact form to get in touch with our team of experts!