acting for the high net wealth client · up to 2016/17, full income tax relief was normally...

ACTING FOR THE HIGH NET

WEALTH CLIENT

Robert Jamieson

MA FCA CTA (Fellow) TEP

7 November 2017

2016/17 TAX RETURNS

• For many years, PA has been offset in

following order:

• non-savings income; then

• interest; and finally

• dividends.

• This normally produced most tax-efficient

end result – see S25(2) ITA 2007.

• No longer position for 2016/17 onwards.

2016/17 TAX RETURNS

(CONT)

• Caused by introduction in FA 2016 of:

• personal savings allowance; and

• dividend tax allowance.

• Individual’s personal savings allowance

can be £1,000, £500 or zero (depending on

marginal rate of tax).

• But dividend tax allowance is £5,000 for

everyone.

2016/17 TAX RETURNS

(CONT)

• 0% starting rate is only in point for those

whose non-savings income does not

exceed PA plus maximum of £5,000.

• Where individual’s total income includes

interest received, it is important to try and

maximise benefit of:

• 0% starting rate for savings income;

and

• personal savings allowance.

2016/17 TAX RETURNS

(CONT)

• Problem with HMRC’s online filing

parameters for 2 groups of taxpayer:

• those with income (including interest)

of > £32,000 where non-savings income

is between £11,000 and £16,000; and

• those with non-dividend income of

between £27,000 to £32,000 where total

income (including dividends) is >

£145,000.

2016/17 TAX RETURNS

(CONT)

• In first case, software will not apply 0%

starting rate to income falling within

starting rate band, ie. there will be charge

of 20% (rather than 0%).

• In second case, software will treat

dividend higher rate band as reduced by

full amount of dividend tax allowance,

even though there may have been spare

capacity in basic rate band, ie. more

dividends will be pushed into 38.1% band.

2016/17 TAX RETURNS

(CONT)

• Affected taxpayers should submit paper

tax returns for 2016/17.

• Normally, this had to be done by 31

October 2017.

• However, HMRC confirm that taxpayers

will have until 31 January 2018 – there is

“reasonable excuse” for late filing.

• Correction difficulty if return is

inadvertently filed online.

2016/17 TAX RETURNS

(CONT)

• HMRC promise that this will be sorted for

2017/18 tax returns.

• Not fault of tax software providers – their

software must follow HMRC’s parameters.

• If it does not, none of their online tax

returns will be accepted.

• They had no choice but to code their

products to give incorrect outcome.

BUY-TO-LET TAX CHANGES

• Up to 2016/17, full income tax relief was

normally available for interest on loan

taken out in connection with individual’s

property letting business.

• W.e.f. 6 April 2017, tax relief for such

interest is being progressively restricted

so that, by 2020/21, there will only be 20%

income tax reduction.

• S24 F(No2)A 2015 does not apply to FHLs.


(CONT)

• Nor does it apply to landlords of rented

commercial property.

• Worst affected will be individuals with

substantial property portfolio and large

borrowings.

• And what about property letting losses?

• Alternative restructuring.

• What about incorporation of business?


(CONT)

• Can CGT and SDLT charges be avoided?

• Take advantage of Upper Tribunal

decision in Ramsay v HMRC (2013).

• Non-statutory clearance service can be

used in order to determine whether or not

business is being carried on.

• SDLT – MV rule in S53 FA 2003.

• 2 main ways of mitigating SDLT charge:


(CONT)

• multiple dwellings relief in S116(7) FA

2003; and

• use of partnership SDLT provisions –

see Para 18 Sch 15 FA 2003.

• Partnership tests.

• Anti-avoidance legislation: S75A FA 2003.

• Case study illustrating tax benefit of

incorporation.

COMPANY DISTRIBUTIONS

• Following liquidation, shareholder will

receive capital distribution liable to CGT –

preferable to receiving income payment.

• Informal dissolutions – S1030A CTA 2010.

• Government believe shareholders are

increasingly seeking tax advantage of

being charged to tax on gains rather than

income.

• New anti-avoidance – individuals only.


(CONT)

• But consultation about more wide-ranging

approach to stop future conversion of

income to capital (eg. reintroduction of

close company apportionments?).

• W.e.f. 6 April 2016, new TAAR applies to

distributions in respect of share capital

on winding up (S396B ITTOIA 2005).

• No statutory clearance procedure, but

HMRC guidance has now been published.


(CONT)

• See Paras CTM36300 – CTM36350.

• Treats distribution on winding up as

income receipt where:

• individual, having interest of at least

5%, receives distribution on winding

up;

• company was close when it was wound

up (or had been at some point in

previous 2 years);


(CONT)

• within 2 years following distribution, he

(or connected person) is involved in

similar trade or activity; and

• it is reasonable to assume that main

purpose, or 1 of main purposes, is

avoidance or reduction of income tax

liability.

• Aimed at “phoenixism”.

• HMRC’s original examples:


(CONT)

• landscape gardener;

• IT contractor; and

• accountant.

• Exemption from TAAR where distribution

received by individual:

• does not exceed his CGT base cost; or

• only comprises irredeemable shares.


(CONT)

• In addition, “transaction in securities”

rules changed and updated w.e.f. 6 April

2016:

• new “connected parties” regime;

• look at reserves on group-wide basis

rather than on company by company

basis;

• “fundamental change of ownership” let-

out made tougher; and


(CONT)

• liquidation to be treated as transaction

in securities.

• Procedural rules for counteraction to

operate in similar fashion to self-

assessment compliance provisions.

TAKE CARE WITH

PERCENTAGES

• Castledine v HMRC (2016).

• In order to qualify for ER on disposal of

shares, it is necessary for individual,

throughout period of 12 months, to have:

• held at least 5% of O.S.C. and voting

rights; and

• been officer or employee.

• Definition of O.S.C. in S989 ITA 2007.

TAKE CARE WITH

PERCENTAGES (CONT)

• O.S.C. means “all the company’s issued

share capital (however described), other

than capital the holders of which have a

right to a dividend at a fixed rate but have

no other right to share in the company’s

profits”.

TAKE CARE WITH

PERCENTAGES (CONT)

• Case concerned disposal of loan notes in

company where taxpayer held exactly 5%

of ordinary shares.

• Unfortunately, company had also issued

some deferred shares with no right to

dividends or votes.

• In reality, these deferred shares were

worthless.

TAKE CARE WITH

PERCENTAGES (CONT)

• But they counted as O.S.C. and so

taxpayer’s interest in company dropped

to 4.99%.

• Company was not “personal company” –

disposal of loan notes did not qualify for

ER.

• Consideration of decision in stamp duty

case of Collector of Stamp Revenue v

Arrowtown Assets Ltd (2003).

TAKE CARE WITH

PERCENTAGES (CONT)

• In that case, issue of deferred shares

purely for tax planning reasons was

ignored.

• Why, then, was decision in Castledine

case different?

• Important for tax advisers to keep careful

eye on shareholders’ percentage

interests, particularly where there are

unexercised share options.

MEANING OF “ORDINARY

SHARE CAPITAL”

• HMRC v McQuillan (2017).

• Sandwich shop business started in 1999

by M and Mrs M.

• Immediate success.

• Company formed in 2004 (Streat) with

view to franchising business – Streat’s

initial share capital of £100 was held as

follows:


SHARE CAPITAL” (CONT)

M – 33 ordinary shares;

Mrs M – 33 ordinary shares;

P – 17 ordinary shares; and

Mrs P (M’s sister) – 17 ordinary shares.



• Subsequently, Mrs P and her husband

lent £30,000 to company.

• Streat continued to prosper.

• Streat approached Invest Northern Ireland

for grant – agreed on condition that loan

was converted into shares.

• On 12 June 2006, loan was converted into

30,000 redeemable ordinary shares.



• These shares carried no votes and were

redeemable at par (but no earlier than

March 2009) – they had no dividend

entitlement.

• Streat was subject to takeover bid.

• Redeemable ordinary shares repaid on 14

December 2009.

• Dividend of £700 per share paid on 23

December 2009.



• Takeover completed on 1 January 2010.

• Question: were M and his wife entitled to

ER for 2009/10?

• HMRC refused claim on ground that

redeemable shares counted as O.S.C. and

so 5% shareholding test was not satisfied.

• Case initially heard in 2016 by First-Tier

Tribunal.



• Dividend of 0% = dividend at fixed rate?

• Comparison with VAT.

• Contrast with shares having fixed

dividend of purely nominal amount.

• First-Tier Tribunal also referred to change

in law on 6 April 2008 when ER was

introduced – no 5% shareholding test

under taper relief.



• First-Tier Tribunal found in favour of Mr

and Mrs M.

• Redeemable ordinary shares were

excluded – taxpayers allowed to claim ER.

• Victory for common sense, but went

against long-standing HMRC view.

• Also at odds with decision in Castledine v

HMRC (2016).



• HMRC appealed.

• Upper Tribunal did not consider that there

was any ambiguity or difficulty about

meaning of S989 ITA 2007.

• Any share capital with no right to

dividend was automatically O.S.C.

• Earlier decision reversed – Streat was not

“personal company” for M and his wife.

ER AND OWN SHARE

PURCHASES

• Significant difference between rates of

CGT (especially where ER is in point) and

higher rates of income tax.

• This encourages owner managers to

extract value from their companies in

form of capital gain.

• With own share purchases, proceeds are

prima facie taxed as income.

• However, CGT treatment is available.

ER AND OWN SHARE

PURCHASES (CONT)

• Requirements are:

• vendor has held shares for 5 years;

• vendor is UK-resident;

• purchase was made for benefit of

company’s trade (and was not part of

any tax avoidance arrangements);

• company is unquoted trading company

or holding company of trading group;

ER AND OWN SHARE

PURCHASES (CONT)

• vendor’s proportionate shareholding

has been substantially reduced – or

eliminated – by own share purchase;

and

• vendor is not connected with company

immediately after own share purchase.

• Formal clearance procedure.

• But what if company cannot afford to pay

shareholder in full?

ER AND OWN SHARE

PURCHASES (CONT)

• Customary nowadays to settle payment in

tranches spread over number of years.

• Known as “multiple completion contract”.

• Vendor gives up beneficial interest in

shares which are bought back – no

further dividends or votes.

• He will normally also resign directorship.

• CGT payment date.

ER AND OWN SHARE

PURCHASES (CONT)

• HMRC accept that multiple completion

contract is valid arrangement – see

ICAEW TR745.

• Is there new problem for ER claims

relating to sale proceeds for second and

subsequent tranches?

• Company does not “acquire” shares from

vendor, given that they are cancelled –

but no longer automatically.

ER AND OWN SHARE

PURCHASES (CONT)

• What if S28 TCGA 1992 does not apply?

• Payments for second and subsequent

tranches represent lump sums derived

from asset (ie. subject to tax under S22

TCGA 1992).

• If so, gain is taxed when tranche is

received rather than at original exchange

date.

• ER denied where vendor is not director.

ER AND OWN SHARE

PURCHASES (CONT)

• Note that clearance under S1044 CTA

2010 only confirms that transaction is not

treated as income distribution.

• It does not say that ER is available.

• HMRC’s argument goes against all

accepted technical analyses of multiple

completion contracts – they are not tax

avoidance schemes.

• Indeed, whole of CGT is paid up front!

ER AND OWN SHARE

PURCHASES (CONT)

• Since ICAEW TR745 has never been

retracted, is there possibility of running

“legitimate expectation” argument in

relation to deals which have already taken

place?

• Should shareholders be looking to retain

“sentimental” 5% stake following own

share purchases?

• And remaining as part-time employee?

PENSION DEVELOPMENTS

• Annual allowance.

• High-income individuals.

• Death benefits.


(CONT)

• Annual allowance (AA) = £40,000 – this

covers individual’s own contributions (+

any contributions made by employer).

• W.e.f. 6 April 2016, AA is subject to taper

mechanism for those with income in

excess of £150,000.

• Taper is at rate of £1 for every £2 of

income above £150,000 until AA drops to

£10,000 (ie. for income of £210,000 +).


(CONT)

• New restriction: taxpayer is high-income

individual if:

• “adjusted income” > £150,000; and

• “threshold income” > £110,000.

• “Adjusted income” = taxpayer’s total

income plus amount of any pension

inputs (including whole of employer’s

contributions).


(CONT)

• “Threshold income” = taxpayer’s total

income, but after allowing for deductible

pension contributions – note special rule

for any salary sacrifice effected on or

after 9 July 2015.

• Special anti-avoidance legislation in

S228ZB FA 2004 – will this bite where

there are losses?


(CONT)

• Death benefits – where pension holder

dies aged 75 or older, any lump sum

taken out before 6 April 2016 was taxable

at flat 45% rate.

• All other withdrawals (including taking

lump sum on or after 6 April 2016) are

chargeable at taxpayer’s marginal rate.

• Where pension holder dies under age of

75, his fund passes on IHT-free basis.


(CONT)

• Nominated beneficiary is then able to take

lump sum or regular income withdrawals

without incurring any tax liability – this

can be done regardless of age.

• Incentive for individuals – particularly if

they are nearing retirement – to maximise

pension contributions instead of making

cash gifts to next generation.


(CONT)

• Use pension plans as vehicle for passing

wealth to next generation in tax-efficient

manner.

• What about borrowing to finance large

pension contribution?

S162B IHTA 1984

• Rules governing deductible liabilities for

IHT purposes have been tightened.

• New S162B IHTA 1984.

• Restriction where loan has been used to

finance (directly or indirectly) purchase

of property qualifying for BR, AR or

woodlands relief.

• Stops practice of borrowing secured on

residence for purchase of AIM portfolio.

S162B IHTA 1984 (CONT)

• Liability must be set against value of

asset before relief.

• Commencement date was originally

intended to be transfers made on or after

17 July 2013, but this could have had

retroactive effect.

• Rule, as legislated, only applies to new

loans taken out on or after 6 April 2013.

• Welcome amendment.

S162B IHTA 1984 (CONT)

• Following planning points should be

noted (these are not caught):

• loan followed by PET;

• loan followed by gift of, say, AIM

shares to spouse; and

• certain equity release arrangements,

eg. home reversion plans.

RECYCLING BR

• Leave relevant business property to

children who then sell it to surviving

parent.

• Stamp duty downside.

• What if parent has insufficient cash?

• Previously, advice was to use IOU – this

is no longer possible.

acting for the high net wealth client · up to 2016/17, full income tax relief was normally...

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