Could some of the negative impacts of the virus actually provide some tax planning opportunities?

Clearly, the COVID-19 pandemic is going to have a significant economic impact on many, which for most unfortunately will be negative. Despite this, there will be some instances where the crisis will present opportunities to undertake some good tax planning.

The true value of assets such as property is what a perspective purchaser is willing to pay for them, at a given moment in time.

During the recent lock-down, a lot of activity has ground to a halt, including in particular the housing market. Factors which will also have an immediate impact on valuation include the prevention from potential buyers from visiting properties, the government cautioning against people moving home, agents and solicitors having to work remotely and lenders withdrawing mortgage products from the market and reassessing lending risk. There is also considerable uncertainty about the near future, with a significant recession probable. Property businesses have already suffered badly at the hands of the taxman in recent years, and have been largely overlooked by the government when allocating COVID related financial support.

These aspects will all undoubtedly already have had an impact on property values. Obviously for most people, the best time to sell will be when prices were high, but if individuals have been considering gifting assets (perhaps to the next generation), then now could be the perfect time to do that. The reason for this is gifts of assets (other than to a spouse) are taxed as though they are sold for consideration equal to the asset’s market value.

A reduction in asset value could in particular help out in these scenarios;

• For those who have been considering gifting ownership of properties to other family members in order to reduce the value of their estate,
• For those who would be interested in settling property into trust,
• For those who would like to transfer ownership into a company (or take property out of a company),
• For those who might want to use pension funds to acquire interest in a commercial property.

Before transferring ownership, I would recommend getting advice to check whether there could be any other consequences to bear in mind (particularly if trusts and companies are involved), and also obtaining a formal valuation so the tax consequence of the transfer can be calculated.

It is also not all a case of doom and gloom; I have had a few conversations with clients who consider now to be a good time to pick up a bargain, particularly with an eye on property development projects. There are undoubtedly opportunities out there for those lucky enough to be in a position to take advantage.

For any personal representatives who are assisting with the administration of estates at the moment, particularly those that have assets they are looking to sell, but have already valued the estate and paid the Inheritance tax (IHT), remember if assets are sold for less than the probate value, you can go back and claim to substitute the probate value for the sale proceeds actually received and by doing so potentially trigger a repayment of IHT.

There are a couple of rules to bear in mind;

• Assets get classed by category (e.g. shares, property). If you want to substitute probate values with actual proceeds of sale, then you must do so for all assets in the same category (so if selling shares for losses and gains, you must net the result).
• You have 1 year following the date of death in which time to sell the shares, but 4 years to sell land and property.

Finally those who have had investments in trading companies recently fail can consider whether negligible value status applies, and if so, from when. Once assets have become of negligible value, a loss for tax purposes crystallises, which potentially could be offset against income of the same tax year in which the loss is deemed to have been suffered, or the previous tax year. If income has reduced, then more tax relief could be obtained if the loss can be offset against an earlier tax year when higher rates of tax were paid.

Please get in touch if you would like any further information about any of these points, or to discuss what Tax Planning opportunities are available to you! You can head to our contact form or give us a call on 01243 782 423!

Investor’s Relief (‘IR’) came into play 17 March 2016, so by no means is it new.

So why are we talking about it? Well, the conditions imposed to qualify for the relief where that shares had to be held for three years post introduction of the relief. This means that the 2018/19 tax year was the first year a claim was possible, but we suspect more people will qualify in the 2019/20 tax year.

What is it all about then? IR allows for a flat rate of ten percent on qualifying capital gains up to a lifetime limit of £10 million. It forms part of the group of tax reliefs which aim to encourage investment and entrepreneurial activity. It broadly works along the same lines as the more well-known Entrepreneur’s Relief (‘ER’), albeit IR is targeted at non-working investors (i.e. not a Director or Employee at time of subscription), but it may also be considered when relief may no longer be available via such schemes as EIS and SEIS. 

To qualify for IR, you had to have subscribed for ordinary shares (fully paid up) in an unlisted trading company, to which neither you nor a person connected to you, is associated with.

When considering the structure of future investments, IR might be something to factor into your decision-making process to expand your investment opportunities. Although the lifetime limit for ER was reduced from £10 million to £1 million in the March 2020 budget, the lifetime limit for IR remains at £10 million and therefore, if available to you, should be utilised to the fullest extent while you still can.

If you currently hold investments and/or are considering making a new investment, but you’re uncertain as to what relief might be available, please do get in touch and we can assist you in looking at your options.

Are you facing a tax bill having incurred capital gains tax liabilities during the 2019/20 tax year, but recently also lost value on other assets as a consequence of the stock market collapse?

It could be worth (subject to suitable financial advice of course) realising some share losses by disposing of carefully selected poorly performing stock. These losses can then be offset against any gains already realised, mitigating your tax liability. Please note you will need to sell these shares by 5 April, as it is not possible to carry back capital losses to the preceding tax year.

You can also potentially still sell shares to realise a loss and then reacquire, side stepping the bed and breakfast anti-avoidance rules by reacquiring the shares either through an ISA, or perhaps have your spouse acquire then (assuming you have a trustworthy spouse who is willing to help!).

Our experienced Tax Team would be happy to discuss your Capital Gains Tax situation – Should you have any questions or queries you can get in touch on 01243 782 423 or by using our short contact form. You can also head to the  GOV.UK website to find out more information about Capital Gains Tax. 

HMRC released their latest report on the tax gap in June. The tax gap is the perceived difference between how much tax revenue should be paid, in accordance with relevant rules and regulations, and how much tax is actually paid.

The latest report reflects on the 2017/18 tax year. The conclusions are that the tax gap has been reduced to 5.6%, which is down from 7.2% in 2005/06 when HMRC started gathering data. However, this still equates to £35 billion, which is actually the highest figure it has been since they commenced collating data in 2005/06.

These figures are of interest to me as it gives a little insight into what HMRC are focusing on, as the analysis will provide specific areas to target for improvement.

Clearly the tax gap will include those who simply have not paid up – but this contributes only £3.9 billion to the shortfall. Of more specific interest is the fact nearly £10 billion comes from mistakes, which are then sub-categorised between legal interpretation and error. In addition to this, £5.3 billion is lost to evasion (income deliberately not being reported), and £1.8 billion to avoidance, where taxpayers seek to gain an advantage that was not intended to be given by Parliament.

Also of interest is other aspects of categorisation of the tax gap – £12.9 billion comes from income tax, NIC and CGT, £12.5 billion from VAT and £5.2 billion from corporation tax.

Then by ‘customer’ group, the biggest category comes from small businesses, which contributes £14 billion, compared with £7.7 billion from large businesses.

I take a couple of things from this – firstly, the public’s perception of things, which is mainly derived from the media, is that the main problem lies with large corporate entities or wealthy individuals, may not be entirely accurate.

Secondly though it helps to understand what the government is trying to achieve with Making Tax Digital (MTD). In particular why there is a focus on VAT and small businesses.

Clients with VAT registered businesses with chargeable turnover in excess of £85,000 per annum are just about to submit their first returns under MTD regulations. Hopefully anyone affected by this has already taken steps to ensure they have the requisite technology to handle the submissions. If not, I would recommend seeking advice ASAP, as otherwise things are likely to get rather hectic in the coming months.

This data though also confirms why MTD for income tax will follow in due course. Had everything gone in accordance with the government’s original plans, MTD for income tax would already be here. But partly due to the technological challenge, and no doubt partly due to resources and attention being focused on other areas of national interest, MTD for income tax has been placed on the back burner. Presently, we are expected MTD for income tax in April 2021; it will happen because it is perceived to be a key strategy behind closing the tax gap.

Finally on this subject, just a reminder that the powers that be consider a big reason for the amount of tax that is lost due to errors is as a result of poor record keeping. In my opinion, the authorities will more and more use technology to help them spot problem areas, in particular small business who are not complying with the new regulations, and these small businesses will consequently have a far higher chance of receiving a detailed investigation into their affairs.

There are always two sides to a story like this, and mainly as a cause of the complexity of our tax system there are also plenty of taxpayers who have been paying more than is required by the legislation, mainly because of mistakes typically borne out of failing to understand the regulations, or simply failing to claim reliefs that are there to help and assist; this point works both ways.

With the objective of providing some balance, I now want to focus on areas whereby taxpayers can often inadvertently end up paying more tax than necessary by missing out on claims for reliefs and allowances.

• If you make a loss when selling an asset, claim the loss, and this loss can then be carried forward to be offset against gains arising in a future year. The loss has to be claimed within 4 years of the end of the tax year in which it was suffered. It can then be carried forward indefinitely.

• If you make losses on shares in a trading company, you could qualify for income tax relief.

• If you are making losses while self employed, particularly at the beginning or the end of your self employment, there are generous rules for offsetting the losses against other income from earlier periods which can often be overlooked

• If you are employed and self employed the chances are self assessment might overcharge your Class 4 NIC liability.

• Utilise the annual ISA and pension allowances to maximise tax breaks.

• Married couples where at least one of the couple were born before 5 April 1935 can claim an additional allowance.

• Married couples transferable allowance can be claimed where one person is a basic rate taxpayer and the other does not make full use of their allowance.

• Married couples should also make sure that ownership of investment income generating assets is divided in a way that ensures each person fully utilises the Personal Savings Allowance and Dividends Allowance, where possible.

• Persons registered with their local council as blind (or with sight that is severely impaired can claim an additional tax free allowance.

• Fixed rate expense deductions – these can apply typically to those in employment who are expected to supply their own equipment and acquire and launder special clothing and uniforms.

• Averaging – those in certain occupations with variable annual profitability (such as farmers) can average their results over 5 year periods. This helps to reduce exposure to higher tax rates in good years and can prevent tax free allowances being wasted in poorer years.

• Rent a room relief – Home owners can receive up to £7,500 tax free rent a year from live in lodgers.

• The trading allowance – claim the £1,000 trading allowance if you have a modest source of self employment or property income, if your allowable expenses amount to less than £1,000.

• Gift relief – If you are a higher rate taxpayer, keep a track on gift aid charitable donations you make as you can claim relief against the higher rate tax that you pay.

• CGT annual exemption – this is now worth £12,000 and should be claimed by anyone with a decent portfolio of stocks and shares. For periods of administration, it is available for the first 3 tax years.

• Estates can also claim some of the costs of administering the estate against CGT.

• Trivial benefits – Employers can (subject to conditions) provide staff with tax free benefits, up to the value of £50 a time.

• Preserve entitlement to allowances where possible – as entitlement to child benefit is withdrawn when income exceeds £50,000, and entitlement to the tax free allowance is restricted when income exceeds £100,000, those who can control how and when they receive taxable income need to keep these thresholds in mind.