Connect – October 2014
Land & Buildings Transaction Tax
The first of the devolved taxes, Land and Buildings Transaction Tax (LBTT), comes into force on 1 April 2015, replacing Stamp Duty Land Tax (SDLT) in relation to transactions involving land in Scotland.
LBTT is similar to SDLT in many ways, however, where SDLT is a slab tax (i.e. the whole price is taxed at a fixed rate) LBTT will be a progressive tax (i.e. slices will be taxed at different rates depending on the bracket they fall into, like income tax). The rates and bands were released by the Scottish Government last week;
|Purchase price||LBTT rate|
|Up to £135,000||0%|
|Above £135,000 to £250,000||2%|
|Above £250,000 to £1,000,000||10%|
Non Residential Rates
|Purchase price||LBTT rate|
|Up to £150,000||0%|
|Above £150,000 to £350,000||3%|
The announcement gives more certainty to the housing market which has suffered in recent months due the Referendum and the unknown rates of LBTT, but it remains to be seen what their overall impact on the economy will be.
The price at which SDLT and LBTT produce the same liability on a residential purchase is £324,285. Prices below this point would see a saving under the new LBTT rates, whereas purchases above that level will be taxed more after 1 April 2015, with the increased rate having a significant impact relatively close to that break-even point. As an example, a £500,000 purchase would attract £15,000 in SDLT, jumping to £27,300 in LBTT.
It is expected that the housing market will react in the coming months with buyers either accelerating or delaying purchases to fall into the most beneficial regime.
If you are considering purchasing a commercial property then the point at which LBBT exceeds SDLT is a purchase price of £1.95m.
Although LBTT doesn’t come into effect until 1 April 2015, transactions that are ongoing at present that are not completed until after this date will be caught by LBTT, rather than SDLT so timing will be crucial. If you are planning a property transaction in the near future we will be happy to discuss the implications of the rate change with you.
Covering The Cost of a Tax Enquiry
In recent years HMRC has been evaluating the way in which it conducts compliance checks. This has resulted in a more focussed approach to collecting revenue and more staff have been allocated to the task of recovering under-declared tax. The Affluent Unit, which looks after the affairs of taxpayers worth £1m and above, has seen a 50% increase in headcount.
This has resulted in an extra £9 billion being raised over the last three years. In 2012-13 the number of tax compliance checks being carried out increased from 119,000 to over 237,000 – in just one year.
Most businesses and individuals know they have done nothing wrong and think that they will never be investigated. This is simply untrue. The vast majority of targets are not selected because HMRC thinks they are being fraudulent but because of perceived anomalies on their returns or accounts; for example, figures that vary from year to year. There are usually perfectly good reasons for this but it may lead to an enquiry from HMRC nonetheless. Some taxpayers are selected completely at random and in general, HMRC enquiries are on the rise.
HMRC enquiries can be a costly affair for a taxpayer. In many cases, a taxpayer might pay more in fees to their accountant than HMRC collects in extra tax. This is one reason why we offer our clients the opportunity to take an insurance policy to cover the cost of professional representation in the event of an HMRC enquiry.
For more details on insuring yourself or your business against the unwelcome cost of dealing with an HMRC enquiry, speak to your normal Henderson Loggie point of contact.
Patent Box- a most valuable relief
The UK government has reiterated that the Patent Box regime is a valuable tax relief which is already encouraging innovation in the UK. The Treasury has said that this regime has resulted in significant investment and new jobs in the UK, particularly on the life science, pharmaceutical, engineering and technology sectors.
The UK Patent Box was introduced 18 months ago as part of the UK Government’s strategy to encourage innovation and bring high value science and technology jobs to the UK. HMRC has predicted that the Patent Box will provide £1.1 billion of tax relief by 2019. Already due to this relief, GlaxoSmithKline has relocated £500m of existing manufacturing activities from Singapore into the UK and invested an additional £200m in UK plants, creating 1,000 new jobs. Patent Box also benefits SMEs, including university spinout companies with patented inventions or licensed-in patents.
Patent Box allows companies to reduce corporation tax rate on profits derived from qualifying patents or exclusive licences in respect of qualifying patents. Once a company has elected into the Patent Box, profits from the patented item and from any product containing the patented item, will be subject to corporation tax at 10%. For example, if a company which has developed a patented part for a medical device, elects into the Patent Box, all of the profits from the sales of the device would be taxed at 10%, less than half of the current corporation tax rate of 21%. If the company has applied for a patent, the tax relief rolls up in the patent pending period and is given in full in the period in which the patent is granted.
In summary, Patent Box tax reliefs are very generous and give many companies an opportunity to significantly reduce their UK corporation tax bill. If you wish to know more contact:
Departing Shareholder? Remember That A Company Can Buy Its Own Shares
HMRC have recently updated and consolidated their guidance on the issue of a company purchasing its own shares, so it seems an appropriate time to remind readers about this often valuable tax planning technique.
A company purchase of own shares can be of particular benefit when shareholders wish to go their separate ways. Often this will create a problem as the remaining shareholders will be unwilling or unable to raise the funds to purchase the shares from the exiting shareholder. When personal funds are available, these will be post tax funds which the individuals have retained after suffering a tax charge.
In such a scenario, it should always be considered whether the company can use its own reserves to purchase the shares, removing the need for the other shareholders to take part in the transaction. Generally when a company purchases its own shares they cease to exist, giving the remaining shareholders a pro-rata increase in their percentage shareholding.
The key to a successful company purchase is often ensuring that the transaction is a capital one, meaning the proceeds will be subject to capital gains tax rather than income tax, often meaning the seller will pay tax at just 10% on any uplift in his original investment.
However, as the alternative treatment for a company purchase of own shares is to tax the distribution as a dividend, it is sometimes preferable to structure the transaction in such a way that ensures this treatment, taking advantage of the fact that dividends received by a basic rate taxpayer are effectively tax free.
To obtain capital treatment for the transaction the transaction must occur to benefit the company’s trade, or be in connection with the payment of an Inheritance Tax liability.
Concentrating on the trade benefit test, this test is typically satisfied where a management dispute is hampering the trade of the company to the extent that a dissenting shareholder has to depart, or whereby an unwilling shareholder, either through retirement, inheritance, or change of financial position, wishes to dispose of his shares. The remaining requirements include;
- The company being an unquoted trading company
- The seller being UK resident
- The seller having owned the shares for 5 years
- The seller’s interest in the company being substantially reduced (to less than 75% of his original interest)
Once the basic facts have been established, it is possible to make a clearance application to HMRC to confirm that the proposed transaction will attract the desired capital treatment. This is a valuable tool in providing the seller and the company with certainty as they carry out the transaction.
We have assisted a number of companies carry out own share purchases over the years and would be happy to help you investigate whether this may be something that could be beneficial for you or your company.
HMRC Credit Card Sales Campaign
HMRC are offering those who accept payment by way of a credit or debit card the opportunity to voluntarily disclose any income which has not yet been declared. After doing so they will have 4 months to calculate the tax and pay what is owed.
It is important that UK businesses are aware that HMRC has the details of all debit and credit transactions made to or by them and are using this information to identify those who have under paid tax.
Changes to pension death benefits – good news for pension savers
Following the announcement earlier this year of increased flexibility in how you can draw your pension, there was another big boost for pension savers recently when the Government confirmed that, from the 6th April 2015, they are to scrap the current 55% tax charge on death, making pensions an even more attractive proposition.
The treatment of your pension death benefits will still hinge on the age at which you die, with differences for those who die before or after age 75, regardless of whether you have drawn tax free cash with a view to drawing down the remainder of the fund as income (often called “drawdown”).
- Death before 75 – If you die before age 75, then your beneficiaries can take the entire pension fund tax free, in any form (lump sum, income). This will apply regardless of whether you have drawn your tax free cash.
This means that anyone already in “drawdown” will have their charge on death cut from 55% to zero so that, even after death, the pension remains a virtually tax free “Trust” for the beneficiaries and may be completely free of Inheritance Tax.
- Death after 75 –After the 6th April 2015, a pension fund can be left to whoever the member nominates as their “beneficiary” (or, indeed, beneficiaries). The funds will again be held in trust, which is virtually free of all taxes, and it is only when the funds are drawn that the beneficiary will pay tax at their marginal rate (as if this were a top up to their income). They also have the option to draw a lump sum less a 45% tax charge, but it is unlikely that many people will find this option attractive.
The withdrawal of funds after the member’s death is obviously the main change, as until now the only way to avoid the 55% tax charge whilst in drawdown, has been to leave the fund to a dependant to draw an income or if it were left to charity. The new rules will mean that the funds can be left to any beneficiary(ies) without suffering a 55% penalty on death pre age 75.
The amount that the government collected from the taxation of pensions is relatively small when compared to other taxes and benefit costs, so this is an instance where many people should benefit at very little cost to the taxpayer. Further guidance regarding this will be provided in the Chancellor of the Exchequer’s Autumn statement on the 3rd December, but what is clear is that there are now very few of the downsides to pensions saving that may have put people off in the past. There is now a genuine incentive for people to save for their retirement in the knowledge that if they are not around to draw the funds themselves, it can be passed on to their loved ones as a tax efficient lump sum.