Tax Planning Opportunities

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!