All posts by hujan.uk

What is a demerger


So, what is a demerger anyway?

Demerger is a bit of a catch-all term for any situation where a company or group of companies splits itself into two or more parts. 

This can be for any number of reasons…

It may be that part is to be sold and part retained

Shareholders may have agreed to go their separate ways

There is simply a need to keep certain groups of assets entirely separate from each other. 

Whatever the reasons, there are a number of different options available, some of which are more straightforward than others.  All can be affected either totally or largely tax-free, but equally all come surrounded by a raft of conditions which must be met in order to avoid any unexpected liabilities.

Case study

Janet and John are the shareholders in a holding company (J&J Holdings) which has two trading subsidiaries – Ladybird Ltd and Penguin Ltd.  The group has been in place for many years and both companies are trading successfully.  However, because some customers have become concerned about the group ownership of both companies, Janet and John have decided that commercially it makes more sense for them to have more direct ownership of Ladybird Ltd and want to remove it from under the holding company.

Direct statutory demerger

This is the simplest demerger situation – known as a “direct statutory demerger.”  Provided the conditions are met then J&J Holdings can simply “distribute” the shares in Ladybird Ltd to Janet and John tax- free so they now own directly the shares in J&J Holdings which owns Penguin Ltd, and at the same time they own the shares in Ladybird Ltd directly.  Specific rules mean there are no capital gains or income tax issues arising for Janet & John.

The key criteria here are (1) that the demerger can’t be in anticipation of a sale, (2) the demerger must be for the benefit of one or more of the trades (3) the company being distributed must be a trading company and (4) the company making the distribution must either be a trading company or the holding company of a trading group.

Because the distribution is direct to Janet and John this will be a disposal of the shares in Ladybird Ltd for corporation tax purposes.  Normally this would be at market value but as the group has been in place for a while the substantial shareholdings exemption should make the gain tax free…

Stamp duty can be an issue in demergers (see below) but in this instance the shares are transferred by way of a “distribution in specie” with no consideration given so stamp duty should not be an issue.

From a company law point of view the amount of the distribution can be set at the book value of the shares in Ladybird Ltd so provided J&J Holdings has the distributable reserves to cover that book value then there should be no issues from an accounting or company law point of view.

Indirect statutory demerger

Let’s make a slight tweak to the situation.  The Penguin and Ladybird trades are instead operated within the same company which is directly owned by Janet and John.  Surely the simple option here would be to transfer the Ladybird trade into a new subsidiary of the current company and then undertake a direct demerger as discussed above?

On the face of it yes, but the existing company is still disposing of its shares in the new Ladybird Ltd and this will be a market value sale for corporation tax purposes.  Because no group has previously existed and the new Ladybird company will not have been owned for more than 12 months the substantial shareholdings exemption will not apply and so the market value gain will be taxable in the existing company.

This is where an indirect demerger comes into play.  Instead of distributing the new Ladybird Ltd to Janet and John directly, they form a new holding company which they won in the same proportions as the existing company – let’s call it J&J Holdings 2024 Ltd.  The existing company then distributes the shares in Ladybird Ltd, but not to Janet in John.  Instead they arrange for the distribution to be made to J&J Holdings 2024 Ltd in exchange for that company issuing them with new shares.

This may seem an odd way to do things but it allows us to access the tax free company reorganisation provisions which mean we don’t have to rely on the substantial shareholdings exemption to make the disposal of Ladybird Ltd tax free. 

The rest of the analysis is fairly similar, save that there has been consideration given for the distribution of Ladybird Ltd (the new shares issued) so we need to rely on the stamp duty reorganisation provisions in order to make sure no stamp duty arises on the transaction.

Statutory partitions

If Janet and John have decided to go their separate ways and one wants Penguin while the other wants Ladybird, either of the options above can still work for them – this is what is known as a partition demerger.  Little changes in this situation save that in the case of an indirect statutory demerger there is likely to be a stamp duty charge because there is not an exact mirror in the shareholdings before and after the transaction.

Non-statutory demergers

As may be gleaned from the above, there will be many occasions where a statutory demerger is not suitable.  This can be because one of the businesses being split is not trading, or perhaps because the transaction is being undertaken in anticipation of a sale of one of the companies.  In both situations the conditions for the tax-free demerger will not be met and so significant tax liabilities may arise. 

In the past the only practical route available was a liquidation demerger as discussed briefly below.  However, changes in company law around capital reductions means that a capital reduction demerger is now a viable alternative in many situations.

Liquidation demerger

A liquidation demerger pretty much does what it says on the tin.  The company (or more often a new holding company) was placed into liquidation and the liquidator distributed the subsidiaries to new holding companies owned by the shareholders.  In exchange, the new holding companies will issue new shares to the shareholders. 

As mentioned above at one stage this was really the only viable alternative where a tax exempt statutory demerger was not available.  However it is not without its complications.  There can be SDLT issues, there is the cost of the liquidators to factor in and at an emotional level some business owners still associate the term liquidation with insolvency (however much that is not actually the case).

There may still be a preference for a liquidation demerger but they are increasingly rare.  The world of tax may not be one well known for being a dedicated follower of fashion but a new kid on the block has in recent years grabbed all of the attention – the capital reduction demerger.

Capital reductions demergers

In the dim and distant past the procedure by which a company could reduce its capital was and long and onerous one and was not one to be approached lightly.  More recently reforms to Company Law have meant that the process for private companies at least is significantly more straightforward. 

The process is rather involved and the precise steps will depend on what the objective of the restructure is.  However at its most basic level the transaction involves the holding company of a group entering into a reduction of its share capital, but instead of paying out cash to the shareholders it transfers the assets to be demerged to a new company owned by some or all of the shareholders.  One of the key requirements from an accounting point of views is that the holding company needs to have enough share capital to cover the market (not book) value of the distribution – if that capital does not currently exist it can be created but the restructure can’t happen without it.

From a tax point of view a number of provisions interact to allow the restructure to proceed without any capital gains tax, income tax or corporation tax consequences.  To be effective each has a number of conditions to be met to be effective but with careful planning this is all achievable.  The over-riding requirement from a tax point of view is that there has to be a good commercial reason for the transaction and we would always recommend applying to HMRC to confirm this in advance.

There can be stamp duty complications again where shareholders are going their separate ways and/or properties are being split so it may not be entirely a cost-free process but relative to the tax costs of not using the approach to achieve a split then these make the structure very economical.  If structured properly HMRC tend to be comfortable with the approach even in anticipation of a sale in the short term.

Are capital reduction demergers complex? 

Yes, relatively they are but with careful planning and the right tax, legal and accounting advice they are perfectly achievable and generally represent the most effective approach to breaking up a group where the restrictive conditions for statutory demergers are not met. 

Next Steps

One tip for the top though – the process can take at least three months from start to finish so early planning is essential to avoid disappointment! Now you know this get in touch with us today!



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Pensions Tax Charge Review


Introduction

In preparing a tax return for our client, we identified that in prior years he had not been considering his pension contributions and how this could impact his tax liability.

The issue

The issue was that our client may have been liable to pay the pensions annual allowance tax charge due to his excessive levels of contributions.

The contributions were excessive as his income levels were above the thresholds which tapered his annual allowance each tax year.

It is an area that is not particularly well-known to the layperson, so it can be easy to be caught out with unexpected liabilities and penalties from HMRC.

How we solved it

We conducted a review of his income and pension input position in order to establish whether he was liable to pay the tax charge. This included looking back from 2017/18 to 2022/23 at the available allowances, any carried forward amounts and whether his income met the high thresholds.
Once we understood this, we assisted the client in reporting the charge on his self-assessment tax return accordingly.

The outcome

It was calculated that he was due to pay a small pensions tax charge for 2022/23, however for previous years he had sufficient carried forward allowance to cover his excessive contributions.

It gave the client certainty that he remained compliant with HMRC, and due to our advice ensured he was able to plan for his contributions going forwards.

Next steps

Do you need to be thinking about your pension contributions and how this could impact your tax liability? Get in touch for expert advice from our team of highly skilled tax advisers.



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HMRC Investigations


Make sure you have your tax i’s dotted and t’s crossed as HMRC investigations are on the increase.

Over the past year, HMRC has significantly increased its tax investigations opening around 250,000 new enquiries. Many of these enquiries have been targeted at high-net-worth individuals (“HNWIs”) and small businesses.

By utilising advanced technology and artificial intelligence, HMRC can now identify potential under-reported taxes by cross-referencing data from various sources, including banks, estate agents, and social media. Similar powers are also used for offshore matters.

Will it be success for Labour?

According to the most recent polls, it is looking like Labour is heading for success in the general election, and they have stated that if successful, they plan to raise up to an additional £5 billion in tax annually by the end of the next parliament. So how will they do this?

Labour plans to support by a £555 million yearly investment in additional HMRC resources, focusing, perhaps unsurprisingly, on high-net-worth individuals (HNWIs) and larger businesses. Labour also intends to enhance HMRC’s authority when enforcing tax payments during ongoing investigations.

In 2022/23, HMRC recovered £39 billion from HNWIs, with even larger sums from bigger businesses, thanks to increased investments in staff and technology. These amounts are expected to rise further with the proposed changes.

Although there is to be a focus on large businesses, it is notable that small businesses represent the majority of tax avoidance cases, and additional resources will likely be allocated to address the recent decline in revenue from this sector.

Why is this Important?

These developments show the importance of taxpayers remaining vigilant regarding their tax obligations, as greater scrutiny from HMRC is anticipated.

The surge in investigations makes it essential for taxpayers to ensure accurate reporting of all income and gains. Complex tax affairs can increase the likelihood of errors, which can have significant financial consequences.

Submitting an incorrect tax return can lead to substantial penalties, calculated as a percentage of the additional tax owed. Penalties range from up to 30% for non-deliberate errors, 100% for deliberate errors, and up to 200% for deliberate offshore matters.

Additionally, late payment interest, currently at 7.75%, can be extremely costly if deadlines are missed.

HMRC Powers

HMRC’s investigations can be incredibly complex, with most of their enquiry and assessment powers being regime-specific and spread across various pieces of legislation.

This fragmented system adds to the complexity of the enquiry process, creates uncertainty, and can undermine taxpayers’ willingness to comply, potentially leading to unfair results.

HMRC is currently reviewing these powers to address these high levels of complexity.

Seek Professional Advice

The success of current investigation activities is anticipated to lead to more targeted campaigns, with ultra-high net worth individuals likely to be in HMRC’s focus.

HMRC will continue to broaden the scope for tax penalties, potentially affecting individuals who were previously not caught.

If your tax affairs are complex, seeking advice from a qualified tax professional is the safest option to ensure there are no easily avoidable errors.

Equally, any business or individual with unpaid tax needs to be aware that their chances of getting away with it are lower than they’ve ever been.

Next Steps

With tax investigations are on the rise it is important to get the right advice.

ETC Tax is here to help, so please do not hesitate to get in touch today.



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Case: Non-Domiciled Investment Banker Loses Appeal Against £675,000 Tax Bill Over Director Loans


Non-Domiciled Investment Banker Loses Appeal Against £675,000 Tax Bill Over Director Loans

Mr X, originally from Spain and residing in Italy, faced a significant tax bill from HMRC after investing £1.5 million of his foreign income into his UK-based company.

The investment was intended to qualify for business investment relief, exempting it from tax. Business Investment Relief (BIR) is a potentially valuable tax relief for UK taxpayers, particularly non-domiciled individuals (non-doms), who have used or are currently using the remittance basis. BIR enables these remittance basis users (RBUs) to invest their offshore income and gains in the UK without incurring taxes on those remittances. In this particular case, however, complications arose when he used a director’s loan account for personal expenses. A director’s loan is money withdrawn from your company’s accounts that does not qualify as salary, dividends, or legitimate expenses.

Mr X accumulated £75,000 in personal expenses through a director’s loan account, which included costs such as hiring private jets, an iTunes subscription, and gifts for his wife. HMRC viewed this as an “extraction of value” in breach of the remittance basis. Consequently, HMRC denied the business investment relief for the entire £1.5 million and issued a tax bill of £675,000.

In response to the tax bill, Mr X appealed, arguing that the legislation should be interpreted as requiring the net extraction of value to breach the rule. It was claimed that the director’s loan was provided in the ordinary course of business. HMRC maintained that any extraction of value, not just net, constituted a breach.

A tribunal judge sided with HMRC, ruling that the legislation did not specify net extraction of value. The tribunal found that Mr X had received value in the ordinary course of business and that personal use of company funds was exactly what the extraction of value rule was designed to prevent. Despite the client’s claims of following legal advice, the appeal was dismissed, and he was held liable for the full £675,000 tax bill.



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Mind the Gap: Small Businesses Bear the Brunt of the Tax Shortfall


Introduction

It appears that small businesses may be the source of a tax shortfall, with a recent issue of Accountancy Age highlighting that around 60% of the UK’s tax gap for 2022-23 was attributed to small businesses.

The tax gap, for those who don’t know, represents the difference between taxes actually collected by HMRC and the theoretical liability i.e. what should have been collected in an ideal scenario.

The figure marks an increase from 59% in 2021-22 and a significant jump from 44% in 2018-19, according to recently released data.

Why the Increase?

Several factors appear to have contributed to the rise:

  • Complexity of the tax system: as we are aware, navigating the intricate web of tax legislation can be overwhelming for many small businesses.
  • Deteriorating service standards at HMRC: declining service standards within HMRC services from HMRC have made the problem worse..
  • Limited Support for small business customers: linked to the second point, many small business owners feel that they are largely left to their own devices without adequate guidance from HMRC and/or relevant bodies.

Among the various taxes, corporation tax seems to present the greatest challenge, followed by VAT and self-assessment. Notably, these are the taxes which are collected less frequently and in the case of corporation tax are less “automated” when compared to PAYE for example, potentially contributing to the tax gap.

The Reality for Small Businesses

The tax gap encompasses various forms of non-compliance, from innocent errors to deliberate fraud. However, there’s a growing concern that many small businesses are failing to file returns, not out of malice or ignorance, but because they can’t afford the taxes owed and wish to bury their hands in the sand somewhat. This issue reflects broader economic challenges and the increasing tax burden on small business.

The Broader Tax Environment

HMRC’s latest figures indicate a near doubling of tax revenues, from £437.6 billion in 2005-06 to £823.8 billion in 2022-23. This high tax environment exacerbates the pressure on small businesses who are already grappling with economic uncertainty and the hangover from the pandemic.

As a small business owner myself I find corporation tax  the most unfair tax. Whereas income tax is more progressive, all businesses earning over £50k in profit must pay 25% corporation tax, (albeit with marginal rate relief available between £50k and £250k). This means that small businesses such as my own, face the same tax rate as large multinational corporations, a situation that I know many, including me, find inequitable.

Looking Ahead

With Labour now taking the helm, the small business community will be keenly watching to see if they will prioritise their needs. What do you think? Do you have hope?

Need Help?

If you’re a small business owner struggling with your tax affairs or seeking to optimise your tax position, ETC Tax can provide the support you need.



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High Earners and the Move Abroad


The Shifting Tax Landscape in the UK: High Earners and the Move Abroad

Introduction

In recent years, the UK has seen a significant shift in its tax landscape. There are now 2.8 million more higher rate taxpayers compared to 2010. This change has concentrated the tax burden on a smaller population segment, with over 60% of the income tax being paid by the top 10% of earners. As a result, many high earners are exploring options to mitigate their tax liabilities, including the possibility of relocating abroad.

Faced with increasing tax pressures and high tax rates, numerous UK residents are considering moving to countries with more favourable tax regimes. Thailand and Portugal have emerged as popular destinations for those seeking a better quality of life and potential tax advantages.

Thailand offers a low cost of living, beautiful landscapes, and a relatively lenient tax system. The country’s non-resident status and foreign income exemption rules make it an attractive option for retirees and remote workers.

Portugal, through its Non-Habitual Resident (NHR) regime, provides significant tax incentives for new residents. Its favourable climate, safety, and high standard of living further enhance its appeal.

Navigating Tax Implications with ETC Tax

However, moving abroad comes with complex tax implications that need careful consideration. One crucial aspect is assessing residence status, as individuals may face split-year treatment. This would mean that the tax year is split into a period of residence and non-resident, hugely impacting how an individual’s income is taxed.

ETC Tax can assist clients in navigating these challenges by:

Determining UK Tax Residence Status:

We can assist with reviewing HMRC’s Statutory Residence Test to establish whether you are considered a UK resident or non-resident for tax purposes. This can help you be confident that you are paying the correct amount of tax for the year where there are complex residence considerations.

Split-Year Treatment:

Advising on the rules and implications of split-year treatment, ensuring that your income is correctly taxed during the tax year in question.

Tax Planning:

Providing tailored advice on how to structure your affairs to take full advantage of tax benefits in your new country of residence.

Compliance and Reporting:

Ensuring that all tax obligations are met in the UK and assisting with these. We’re happy to help with all or just part of the process. We are flexible in terms of our level of support.

Next Steps

Relocating abroad can offer significant tax benefits, but it requires expert guidance to navigate the complexities of international tax law. ETC Tax is here to help you every step of the way, ensuring a smooth transition and optimal tax outcomes. Please do get in touch with us at [email protected] should you want to find out more.



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Considerations when selling you business


Why it’s always important to ‘consider your consideration’ carefully when selling your business

Introduction

As a Chartered Tax Adviser, one case that stands out from my study days is Marren v Ingles and the curious reference to a “chose in action”.

For those that are interested(?), the dictionary (or legal) definition of a “chose in action” is

An intangible property right or property. which is legally not in a person’s possession. but is only enforceable by legal process.

Makes perfect sense right?

Before you stop reading, let me explain why it is important in the context of deferred consideration.

The rise of deferred consideration

Deferred consideration is becoming increasingly more common in business sales, as it allows sellers to achieve their desired price while reducing the buyer’s risk of overpaying upfront, especially in an unsettled market.

How does deferred consideration work?

Often deferred consideration is contingent on certain future events occurring and payment of that amount will be deferred until that event occurs.

Deferred consideration can also be used to incentivise key individuals to stay with the business after the sale.

Usually, the deferred amount is calculated later, often based on the business’s profits over the next two to three years.

So why does it matter from a tax point of view?

It matters, because the structure of consideration determines when the capital gains tax (‘CGT’) liability arises.

What are the different types of deferred consideration?

Ascertainable (can be calculated)

As mentioned above, deferred consideration is often paid once certain conditions are satisfied or events have occurred. This could be things like the company being floated on AIM, meeting certain profit targets, or winning a new contract.

Although the seller will not know when the consideration will be paid, they do know how much will be paid i.e the deferred element is fixed (or can be easily calculated) at the date of sale.

Deferred ascertainable consideration must be brought into account at its full value at the date of disposal, and will be taxed in full in that tax year.

No discount is given due to the consideration being paid over several years. So, although consideration that will be received in three years’ time is clearly worth less than consideration received immediately, no reduction is applied.

The only concession is that if the deferred consideration will be paid more than 18 months after the date of sale, the seller may be able to ask to pay the capital gains tax due in instalments.

Additionally, if, not all of the deferred consideration is paid a claim can be made to adjust the sale proceeds and the seller can reclaim some of the capital gains tax they have paid.

Unascertainable (cannot be calculated)

Sometimes the deferred consideration element cannot be calculated at the date of sale – it is unascertainable. This is your classic “earn-out”. This is usually because the amount of that consideration is directly linked to the outcome of future events.

I take you back now to the start of this article, and that is because when this happens the right to the future consideration (the “chose in action”) is treated as an asset in its own right. 

Unascertainable contingent consideration is not brought into the original capital gains tax calculation.

Instead at the date of sale, the seller is charged capital gains tax on the cash received plus the value of the right to the future contingent consideration. This essentially means the seller pays tax on something that they do not know the value of.

The valuation of this right can be tricky and can require specialist help. (This is something ETC Tax can assist with if required).

When the future contingent consideration is received, this is treated as a disposal of the right and therefore a further capital gains tax computation will be required!

And it gets even more complex….as, if the contingent consideration is received in stages more capital gain tax calculations will be required, with the right to future contingent consideration revalued each time as part of a part-disposal calculation!!

There are two important practical issues:

•            the right to receive unascertainable contingent consideration must be valued which may require negotiations with HMRC; and

•            the future disposals are not related to the original disposal, so any reliefs (such as business asset disposal relief) will not apply to the disposal derived from the contingent consideration (except in limited circumstances)

So, what if the future amount received is significantly less than expected? What if it is less than the market value of the right which was taxed on completion?

In this situation, the seller will make a loss, and can make an election to carry back the loss on the disposal of the earn-out right to be set against the gain on the original asset.

Other types of consideration

Consideration in shares

Sometimes the seller of a company will receive other shares as consideration for the sale of the shares in their company.

This usually happens if the buying company is a quoted company, or might become one after the transaction.

What is the tax treatment of consideration in shares?

Provided that certain conditions are met:

•            the seller can defer any capital gains tax liability on the sale of the shares where the consideration is in the form of shares in the buying company; and

•            the new shares are treated as having been acquired on the same date and at the same price as the original shares.

Consideration in loan notes

Sometimes the seller receives loan notes as part of the consideration for the sale of their shares. These loan notes are likely to be qualifying corporate bonds (QCBs).

What is the tax treatment of loan notes?

If QCBs are received in exchange for shares, there is no disposal for capital gains tax purposes. However, the gain which arises on those shares is calculated at the date of the exchange and then ‘frozen’. It will therefore only then crystallise when there is a disposal of the QCB.

If the loan notes are not QCBs, there is also no disposal for capital gains tax purposes and the new asset (the loan notes) will stand in the shoes of the old asset, so that a gain arises when the loan notes are redeemed.

Working out the tax treatment of different types of consideration can be very complex, and with sellers and buyers increasingly opting for more complex consideration mechanisms in transactions, and the use of earn-outs in even “friendly” sales, such as MBOs, it is important that advisers understand how to deal with contingent consideration.

Next Steps

We have lots of experience in this area, and are happy to help you ‘make the complex simple’, please get in touch



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Tax Partner Pro – Your Q answered June 24


We have been supporting our Tax Partner Pro members via our email and call back service. Here’s an overview of some of the more recent questions we have answered during June 2024

Q

The client has the following income  – 

UK State pension /UK self-employment / UK rental income

This will all continue – however he plans to live 7 months a year at his Portugal home (he has a permanent residence permit) and live 5 months at his UK home.

He will have no income generated in Portugal.

Broadly once this happens does he continue to complete his UK tax return as normal, and pay UK tax?

Then have an obligation to declare all this income in Portugal and pay no further tax due to the double tax treaty.

A

It’s difficult to determine whether he’d become a non-UK resident from the below as it’s largely based on a number of days in the UK / ties to the UK etc.

If someone spends 5 months of the year in the UK, more often than not they will remain UK resident.

As a result, the answer is yes, he would continue to declare his income in the UK and pay tax here.

The double tax treaty between the UK and Portugal will dictate which country holds the primary taxing rights and which therefore must give relief. I’d imagine if the sources of income are UK-based, the UK will retain those taxing rights and Portugal will deduct UK tax suffered from their calculations.

Q

A tax resident of Australia has had UK tax deducted from a lump sum pension withdrawal from a SIPP. HMRC have given him a partial refund based on a standard tax calculation, including the benefit of a Personal Allowance, though he now has an Australian passport. But should he pay any UK tax on this SIPP withdrawal?

A

If the client in question fully resident in Australia and therefore is non-resident in the UK?

If so, article 17 of the double tax treaty is very clear and states:

Article 17 – Pensions and annuities

1. Pensions (including government pensions) and annuities paid to a resident of a Contracting State (in this case Australia) shall be taxable only in that State (Australia).

2. The term “annuity” means a stated sum payable periodically to an individual at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.

HMRC might require a certificate of residency from Australia in order to process a complete repayment of the UK tax so that needs to be explored.

Q

New client Husband and Wife in their 70’s.  They have an unincorporated partnership that rents out commercial property.  They report under self-assessment as a business income (trade partnership) rather than income from land and property. The partnership has its own UTR. market value of the portfolio is around £1.5m

I don’t believe the business will qualify for IHT BPR as this income is deemed to be an ‘investment’.  They don’t provide any ‘services’ as such.  Please can you confirm this is the case?  The client believes that the business ‘may’ qualify, but I don’t believe it will.

A

Simply holding property as an investment asset (whether personally, in a partnership or indeed a Ltd Company) would not qualify for BPR.

To qualify for BPR the partnership’s business must not be wholly or mainly that of making or holding investments.

The bar they’d have to get over to claim the partnership is trading would be very high.

Q

Have clients who live in a property owned by a company, they are only Directors/Shareholders. The company just owns the property (envisage building a portfolio) non-trading.

The company pays service charges etc, Directors pay no property costs. The property is a flat in Cheshire costs £524,000.

  • What if any is Benefit in Kind year ended 5/07/2024. How is it calculated?
  • No payroll operated – Do we have to open PAYE scheme or can we just do transfer to Directors Loan Account?

A

With regards to the property being lived in there are two issues here:

Benefit in kind

If a director is living in a property that is owned and paid for by the company then this is a benefit in kind on which both Class 1A NIC is payable by the company and Income tax is payable by the employee.

If the property is rented, you simply use a market value rent as the benefit figure.

If the property is owned, there is a formula for calculating the benefit in kind which can be found here:

The benefit value needs to be entered into form P11D and submitted to HMRC by the company by 6th July following the end of the tax year the benefit arose. The benefit value needs to be entered on the director’s tax return.

To avoid the above, you could post a rent figure to the DLA which removes the BIK issue, however,A the company will need to report the rent as income.

Annual Tax on Enveloped Dwellings – ATED

In addition to the BIK issue detailed above, where a Ltd company owns residential property and doesn’t rent that property out on commercial terms, the company is required to submit an ATED return each year and pay the ATED charge.

The charge is based on the value of the house.

For a property worth £524,000, the annual ATED charge is currently £4,400.

The ATED return should have been submitted to HMRC by 30 April each year.

The only way to avoid the ATED charge is for the person living in the property, to pay and actual market rent (although an ATED return is still required)

Next Steps

Don’t forget to get in touch as part of your Tax Partner Pro membership. [email protected]



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