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Practical points - Personal tax

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This page has been archived because it is no longer current information but is still relevant, or it is current but over 12 months old
  • Publish date: 23 September 2016
  • Archived on: 31 December 2017

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in practice, policy and legislation related to personal tax, including: capital gains tax; income tax; inheritance tax; offshore investments; pensions; residence and domicile; savings and investments; and trusts.

Practical points
203 Filing returns without a notice to file
  HMRC recently published an item on its Working with tax agents blog about submitting tax returns for clients who have not received a return or a notice to file.

It has always been possible to file an income tax return using commercial self-assessment (SA) software if the client was previously in SA and their unique taxpayer reference is available. This approach is used regularly by agents where the client has been incorrectly removed from SA by HMRC or where SA is the simplest way of dealing with the liability or refund due for the year. 

The increase to the threshold for savings and dividend income below which HMRC does not automatically require an SA tax return is likely to make this practice more prevalent, especially as HMRC cannot currently pre-populate these figures. For more details of the updated SA filing criteria, see practical point 128 in August 2017: Investment income below the threshold for an SA return – what to do.

HMRC is now asking agents to re-register their clients for SA before filing a return to ensure that the record is corrected and that PAYE calculations (P800s or PA302 simple assessments) are suppressed or cancelled. We have asked HMRC to clarify why this additional step is required and why HMRC cannot instead update the record when the SA return is filed. 

A client can be registered online, as HMRC suggests, or by phoning the agent dedicated line. We have had some reports of HMRC contact centres resisting agents’ requests for the issue of a tax return. Please let us have your feedback on this process (contact Caroline Miskin).

Contributed by Caroline Miskin
171 Risk of wrong code numbers for employees who receive bonuses
 

Employees who receive irregular payments, for example periodic bonuses, may receive wrong PAYE code numbers. They should visit their personal tax accounts (PTAs) to check and, if necessary, change estimated income figures for the current and subsequent tax years.

Bonuses and other one-off payments to employees are included in estimated income for the year on PTAs. HMRC’s systems are likely to interpret such one-off payments as recurring because most payroll software does not contain a facility to tell HMRC that a payment is a one-off.

Under HMRC’s new dynamic PAYE coding process, tax codes are now being issued much more frequently, with the aim of increasing the number of employees who pay the right amount of tax via PAYE during the year.

We recommend that employees who have received a bonus or other one-off payment should check the estimated employment income figures on their PTAs and correct if necessary. If they do not do so, excessive estimated income for the year may result in the issue of incorrect code numbers containing, for example, unwarranted restrictions of personal allowances and leading to overpayments of tax.

Taxpayers can access their personal tax account by logging onto gov.uk/personaltaxaccount and signing in using a Government Gateway (GG) ID and password. Taxpayers who do not already have a GG account can set one up straight away. They should have to hand their national insurance number, a telephone number, and either a P60 or a payslip as certain details on these will be needed. These documents are needed only when signing up for the first time. Subsequently, all that is needed is the GG ID and password, plus an access code that will be sent by text to their phone each time they log in.

Contributed by Peter Bickley

170 SA online filing: a workaround for exclusion 60
 

HMRC is working on an in-year update of self assessment software to remove some of the online filing exclusions for 2016/17. The fix is expected to be put in place in October, although a specific date is not available at the time of writing.

One exclusion that will not be fixed by this forthcoming update is number 60. This states that a taxpayer who is required to complete a capital gains page will not be able to do so online if the net gain/loss is nil.

HMRC is now endorsing the following workaround to allow such returns to be filed online:

Where there is no overall gain or loss to enter in:

  • both ‘Gains in the year, before losses’ (box 6) and ‘Losses in the year’ (box 7) on the capital gains section, it is permissible for the software to support the entry of £0.01 in ‘Losses in the year’ (box 7);
  • both ‘Gains in the year, before losses’ (box 17) and ‘Losses in the year’ (box 19) on the capital gains section, it is permissible for the software to support the entry of £0.01 in ‘Losses in the year’ (box 19);
  • both ‘Gains in the year, before losses’ (box 26) and ‘Losses in the year’ (box 27) on the capital gains section, it is permissible for the software to support the entry of £0.01 in ‘Losses in the year’ (box 27); or
  • both ‘Gains in the year, before losses’ (box 34) and ‘Losses in the year’ (box 35) on the capital gains section, it is permissible for the software to support the entry of £0.01 in ‘Losses in the year’ (box 35).

If this workaround is followed, no additional tax will be due as this figure will be regarded as zero in the tax calculation. Software developers have also been notified of this workaround.

Contributed by Caroline Miskin

146   Tribunal finds UK domicile based on father’s and grandfather’s domiciles
 

In Henderson v HMRC [2017] UKFTT 0556 (TC), the First-tier Tribunal (FTT) found that four children were all UK-domiciled from birth. Their grandfather never acquired a domicile of choice elsewhere and their father accordingly had a UK domicile of origin, which he never lost.

The children’s grandfather was born in the UK. He moved to Brazil when he was in his early thirties with his Brazilian wife. They lived in Brazil for around six years, and their children (including the father of the taxpayers in question) were born there. The family subsequently returned to the UK.

The father of the children in question was three and a half years old when the family returned to the UK and has lived in the UK ever since. He noted he has now, and has at various points had, intentions to move abroad. He is married with his own children, who claim that they are not UK-domiciled.

The FTT concluded that the grandfather never acquired a domicile of choice in Brazil. It noted that although he was living in Brazil at the time of his son’s birth, before that time he had not formed the intention to reside permanently or indefinitely in Brazil. Further points discussed for completeness, although they were not relevant given the first finding included:

  • whether the grandfather abandoned a Brazilian domicile of choice before his son turned 16; and
  • whether his son acquired a domicile of choice in the UK after turning 16.

From the weekly Tax update published by Smith & Williamson LLP

 145  Plan for tax due on dividends
 

Directors and shareholders of micro-companies generally take significant dividends from their companies. In past years the practice has been to take a dividend payment sufficient to cover the taxpayer’s basic rate band, as before 6 April 2016 dividend income lying within the basic rate band attracted no further tax.

If this pattern of dividends continued after 5 April 2016, there may be tax to pay for 2016/17, as dividend tax at 7.5% will be due once the taxpayer’s total dividend income for the year exceeds £5,000.

Where the taxpayer also receives a salary or pension taxed under PAYE, HMRC will probably have adjusted their PAYE code to collect an estimated amount of dividend tax, using the dividend income received by the taxpayer in 2014/15 to estimate the level of dividends received in 2016/17.

Where the salary is very small or non-existent, HMRC will not be able to collect sufficient dividend tax through PAYE. In those cases, the taxpayer will have to pay the dividend tax in their self assessment (SA) balancing payment for 2016/17, by 31 January 2018. A balancing payment due on that date will also trigger a payment on account for 2018/19, so the taxpayer will receive a bill which is 50% bigger than he or she expects. You need to prepare your clients for these large tax bills.

Where a non-earning spouse has received a large dividend, he or she may have a tax liability for the first time, and should report that dividend income on an SA tax return. Check that all the shareholders in your client companies are submitting tax returns for 2016/17 to declare dividend income which exceeds £5,000.

From the weekly newsletter of the Tax Advice Network

 130

Tax returns: do I have to file one?

 

Do I have to file a tax return? The answer to the question is simple, straightforward and unambiguous. Yes, if HMRC has given you a notice to do so. No, if it hasn’t. It’s as simple as that. And the rule applies to individuals, trustees, companies, partnerships, children, adults and non-residents alike.

So how could any confusion creep in? Well, it appears that government guidance on running a limited company includes the advice that: “As a director of a limited company, you must: …register for self assessment (SA) and send a personal SA tax return every year.” Based on this, HMRC asserted in the recent First-tier Tribunal (FTT) case of Kadhem v HMRC TC05929 that “as a company director one of the appellant’s responsibilities is to register for SA and send a personal SA tax return each year without prompt or reminder from HMRC” and that HMRC “do not issue reminders to file tax returns and have no obligation to do so”. They thus sought penalties from Mr Kadhem in respect of his alleged delinquency. Happily, the tribunal set HMRC straight on this.

Absolutely no one has any obligation to file an SA tax return spontaneously, as it were. It is disturbing to think that anyone in HMRC thinks otherwise. OK then: if you don’t have to file a tax return unless one is demanded, what is your obligation under SA? Essentially it is to “notify chargeability”. That is to say, if you are chargeable to income tax or CGT for a tax year and you haven’t received a notice requiring you to file a tax return, you must declare the fact of your chargeability to HMRC, normally within six months of the end of the tax year.

But, crucially, there are exceptions. Broadly, you are absolved from your obligation to notify chargeability if you have no chargeable gains, you aren’t liable to the high income child benefit charge and all of your income is either taxed under PAYE (or coded out under PAYE) or is taxed income or dividend income of an amount which doesn’t render you liable to pay further tax. Not a word about whether you are a company director.

One more interesting point. Although a similar requirement to notify chargeability applies to companies, there is no cognate obligation imposed on partnerships (for the rather obvious reason that a partnership is not itself chargeable – it’s the partners who are chargeable). It’s good practice to tell HMRC when a partnership commences, so that HMRC can issue returns at the right time; but don’t let HMRC tell you that a failure to do so carries any penalty.

From Brass Tax, published by Berg Kaprow Lewis

 129

Exclusions from online filing for 2016/17: update

 

  HMRC has provided an update on the exclusions from online filing. For 2016/17 there are new exclusions to deal with the impact of the personal savings and dividend allowances, where software cannot deal with the complexity of calculations in all circumstances.

Where an exclusion applies the return should be filed on paper and the deadline is extended to 31 January 2018. See the article on page 13 of May 2017 TAXline. The list of exclusions has been updated; the latest list is Version 4, dated 19 June 2017, HMRC recently provided us with an update :  HMRC is working hard to ensure that no tax is incorrectly assessed for a very small number of SA customers, who have a very unusual combination of income types.

“HMRC is committed to helping customers file online for 2016/17 and is discussing how best to achieve this with agent representatives and software providers. Further information will be provided as soon as it becomes available.”

Tax agents and individual taxpayers who are planning to file 2016/17 tax returns on paper because they fall within the exclusions may wish to delay filing until further details of the possible solutions are available. We understand it may be October before any changes to the SA software can take effect. We will provide updates in our newswire.

Contributed by Caroline Miskin

128

Investment income below the threshold for an SA return: what to do

   

The criteria for filing a self-assessment (SA) tax return have been updated for 2016/17. This was covered in the article Who’s in and who’s out? in May 2017, and the list of criteria is available here.

Two of the criteria relate to taxable dividend and savings income, and a return is required where:

  • income from savings or investments was £10,000 or more before tax; or
  • income from share dividends was £10,000 or more before tax.

This begs the question about the process for those who have interest or dividend income which is below these limits but on which tax is due (eg, because the income exceeds the personal savings allowance or dividend nil rate band), and who do not meet any of the other criteria to file a return. The information on GOV.UK is incomplete on this point. We are able to clarify the process. HMRC has confirmed our interpretation.

Untaxed income below the thresholds for SA must be reported to HMRC by phoning the HMRC contact centre on +44 (0)300 200 3300 or the agent line on +44 (0)300 200 3311.

Where possible HMRC will collect the tax due on this income by making an adjustment to the taxpayer’s PAYE tax code. Where this is not possible (because there is no source of income liable to PAYE, or the PAYE income is insufficient to take the adjustment), HMRC will put the taxpayer into SA and issue a tax return.

HMRC generally carries tax code adjustments for interest and dividends forward to subsequent tax years; in such cases it will be important to monitor tax codes and to notify HMRC if the amount of income changes.

Contributed by Caroline Miskin
113
Scottish rate of income tax
  HMRC has published a newsletter explaining the changes that will be needed so that pension scheme members receive tax relief based on their residency tax status – see Pension schemes Scottish rate of Income Tax newsletter – May 2017

If the rate of income tax for Scotland diverges from the rate in the rest of the UK, relief must be applied to the members’ contributions at the correct rate.

From January 2018 HMRC will advise pension scheme administrators of the tax residency status of their individual members on an annual basis.

The newsletter explains the transition to the secure data exchange service (SDES) that will be used for the two-way communication between the scheme administrators and HMRC. SDES is a secure online service that allows businesses and HMRC to send and receive bulk information via the internet.
 
 112 Calculating the foreign tax credit
  When the change to the taxation of dividends and savings was announced it was envisaged there would be difficulties with programming the tax software to correctly allocate the personal allowance and the various tax rate bands and that has indeed proved to be the case (see the article by Tim Good in May 2017 TAXline magazine). Various exclusions have already been listed by HMRC where the tax calculation gives the wrong answer and so paper returns can be filed without penalty up to 31 January 2018.  

Another variation of the problem has come to light: how to calculate the available foreign tax credit (FTC).

The allowable FTC is the lower of:
the foreign tax deducted or the tax allowed under the double tax treaty; and
the UK tax paid on the foreign income.

In my experience the tax software does not calculate the FTC for you, and up until a few years ago it seemed that the HMRC system did not calculate it either, so many people just claimed all the foreign tax paid – and unless there was an enquiry there were no questions asked! HMRC is now more sophisticated and calculates the FTC based on the tax treaties. 

The first stage in calculating the FTC is to check the rate that can be claimed using the Digest of Double Taxation Treaties and if this is less than the actual tax deducted, this is the foreign tax to compare with the UK tax payable on the foreign income. 

To calculate the UK tax it is necessary to calculate the tax on the total income including the foreign income and then recalculate on the total income without the foreign income. The difference is the UK tax payable on the foreign income. Before the introduction of the dividend allowance and the personal savings allowance it was easy to see what the UK tax was, but now it could be that some of the foreign income falls into a 0% band and it may not be immediately obvious what tax rate applies to the taxable portion.

If the UK tax is less than the amount calculated using the treaty rate/the amount actually paid, then that is the most that can be claimed.

I suggest doing a calculation using the net-of-tax foreign income received to see if that would give a lower tax bill. If that is the case there is no FTC.

Contributed by Sue Moore
104
Taxation of index-linked loans: time to review affected trusts
  Before the introduction of the transferable nil rate band (NRB) for deaths on or after 9 October 2007, will planning was necessary to ensure the NRB of the first spouse/civil partner to die was not wasted. Two popular ways of doing this were:
to gift assets to the value of the NRB to beneficiaries other than the spouse/civil partner; or
to create a discretionary trust in  the will.

The first method was only available to those couples who had sufficient  assets and wealth to allow the  surviving spouse/civil partner to live comfortably without the assets gifted away from them.

The second alternative was very popular as it allowed the surviving spouse/civil partner to continue having the benefit of the assets as a beneficiary of the discretionary will trust without them being in their estate.

However, for many couples the family home would be the main asset and so half of the house would pass into the trust. As this could cause complications it was often provided that either the trustees could take a charge over the assets or a loan would be made to the surviving spouse/civil partner. Sometimes the loan would be linked to the Retail Price Index, meaning that the loan plus an uplift has to be paid to the trustees in order to settle the amount due, normally after the second death. 

In its April 2017 Trusts and Estates Newsletter, HMRC says that it is challenging the arrangements where an uplift is paid as it believes the uplift in value above the principal sum initially lent constitutes interest under s369(1) Income Tax (Trading and Other Income) Act 2005, on which income tax is payable.

As part of the challenge HMRC has issued closure notices on a number of cases, and none have been appealed. HMRC will be writing to all taxpayers known to have entered into these arrangements, inviting them to consider their position and settle the income tax payable with HMRC. In cases where the trustees elect not to settle, HMRC will issue closure notices, against which there is a right of appeal. On receipt of an appeal, HMRC will consider any additional information provided but in the absence of agreement, it intends to take cases to the tribunal.

Trustees with such a loan in place should look in detail at the terms of the loan. In some cases the uplift may fall within the CGT regime rather than the income tax regime, or it could be that the terms do not require an uplift to be paid.

If the loan has not yet been repaid the trustees should take advice to ascertain if the terms can be changed to avoid a tax charge. That said, the uplift in the value of the loan could be saving IHT at 40% whereas the tax paid on the income, albeit at 45% in the trust, could be reduced to nil by distribution to non-taxpaying beneficiaries – so it would be beneficial to do the sums first.

Such problems may continue for a while as it can still be useful to retain a NRB discretionary will trust in current wills, for example: to protect funds from care home costs; to protect assets for the children in the event of the surviving spouse remarrying; or where the surviving spouse already has, or could become, entitled to a further NRB from a different spouse. If that is the case consideration should be given now, while the will can be changed, as to how the trust is to be funded: by physical assets, a charge over assets or by loan? And if by loan, with or without an uplift?

Contributed by Sue Moore
103
Deceased estates: £100 savings income de minimis extended to 2017/18
  Banks, building societies and NS&I no longer deduct tax from interest paid. For most individual taxpayers, the interest they receive will be taxed at 0%, as it is covered by their savings allowance or savings rate band. Estates of deceased persons are not entitled to the savings allowance or savings rate band, so all the interest the estate receives during the period of administration is taxable, and should be reported to HMRC on a tax return. 

To avoid thousands of tax returns being submitted reporting tiny amounts of interest, HMRC introduced a concession for 2016/17. This allows administrators of an estate not to submit an income tax return for the estate where the only income is savings interest and the tax liability is below £100. HMRC’s latest Trusts and Estates Newsletter confirms that this concession has been extended to 2017/18. 

From the weekly newsletter of the Tax Advice Network
102
Probate fees - where are we now?
  As reported previously (see practical point 64 in April 2017), the government proposed an increase in probate fees, despite the concerns expressed by ICAEW and others in response to earlier consultation (see ICAEW REP 61/16).

The proposal was to link the level of the fee with the size of the estate. The increase was to be introduced by statutory instrument (SI) rather than in legislation subject to the scrutiny of parliament. The parliamentary Joint Committee on Statutory Instruments, made up of MPs and peers, reviewed the proposals and concluded they were unlawful. They said pushing through the increases by SI was beyond the powers of the Lord Chancellor, as the increase was equivalent to putting a new tax in place because the fees were disproportionate to the service provided.

Despite this, the proposal to increase the fees was slipped into parliamentary business on 19 April 2017 in the Non-Contentious Probate Fees Order 2017. After a 15-minute discussion the SI was approved, to be brought into effect before the dissolution of parliament for the general election.

But on 21 April 2017 it was announced that the increase in fees would not go ahead in May as planned. The rather puzzling reason given was that there was insufficient time for the legislation to fully go through parliament before the general election.

We wait to see if the proposals are revived after the general election.

Contributed by Sue Moore
101
PPR and period of ownership 
  The case of Higgins v HMRC TC05724 provides a new twist on the normal arguments regarding the relief for the only or main residence.

In October 2006, Mr Higgins entered into a contract for the purchase of a leasehold apartment, off plan. Completion was not, of course, going to take place until the building had been completed. Completion occurred in January 2010 and Mr Higgins moved in. He subsequently sold the flat and claimed the private residence exemption under s222, TCGA 1992 on the grounds that it was his only or main residence throughout his period of ownership.

HMRC accepted that the relief applied for the period in which Mr Higgins occupied the property as a residence. However, it said that his period of ownership did not start on completion; it started on exchange of contracts, so for a very large chunk of his period of ownership, the property was not his residence. HMRC drew attention to s28, TCGA 1992 which provides that for CGT purposes an asset is acquired at the time the contract is made and not when it is conveyed to the purchaser.

Although this sounds straightforward, it was a bit of a problem here because at the date of exchange of contracts, the flat did not exist – it had not yet been built – so it is difficult to say that Mr Higgins was deemed to acquire an asset at a time when it did not exist. (However, I suppose that’s what you get with deeming provisions.)

The tribunal held that a distinction should be made between the time of acquisition in s28 and the meaning of “period of ownership” in s222. Accordingly, it decided that his period of ownership should begin on the day of completion when he had the right to occupy the property.

I remember that a similar issue arose in Campbell Connelly v Barnett 66 TC 380 in dealing with rollover relief under s154 and the requirement that the replacement asset was taken into use “on acquisition” (which under s28 would be on exchange of contracts). The court held that acquisition meant completed acquisitions, not those which still lie in contract. I always found this conclusion difficult because that seems to be exactly what s28 was designed for. However, the case of Higgins reinforces that position and it will be interesting  to see in what circumstances s28 can ever apply in future. It will certainly cause a problem in those circumstances where s28 is being used to ensure  that a disposal takes place in a convenient year.

Contributed by Peter Vaines, Field Court Tax Chambers
100 The Excalibur scheme to generate capital losses 
  The FTT has considered the use of a bed and breakfast scheme designed to generate a capital loss under s106A(5), Taxation of Chargeable Gains Act 1992 (TCGA 1992), known as the Excalibur scheme (Adrian Kerrison v HMRC TC05800).

The taxpayer intended to generate a capital loss using the 30-day share matching rule in s106A(5), TCGA 1992. He then claimed this loss (of around £1m) against income under s574, Income and Corporation Taxes Act 1988 (ICTA 1988), now s131, Income Tax Act 2007. 

HMRC argued that the sale and buy back of the shares should be disregarded for CGT purposes under the ‘repo’ rules (s263A, TCGA 1992 together with s730A, ICTA 1988). (The effect of these rules is that combined sale and repurchase contracts for shares and securities are not treated as involving any disposal of the asset for CGT purposes.) The FTT disagreed. These repo rules did not apply as the interim holder was economically exposed to changes in value. The FTT did however find that the loss should be reduced to nil under the value shifting rules in s30, TCGA 1992. 

HMRC also argued that an income tax liability arose on the waiver of the loan as part of the scheme but the FTT disagreed. It noted that the waiver was entirely voluntary, there was no obligation of any kind to make it, and  it was a one-off transaction of a capital nature. The purpose of the loan waiver was to complete the scheme as planned, not to provide any benefit to scheme participants. 

In short, the FTT judge dismissed the appellant’s appeal against the refusal of his claims to a capital loss and to relief against income tax in respect of that loss, but allowed his appeal against HMRC’s conclusion that the loan waiver was subject to income tax.

From the weekly Tax update published by Smith & Williamson
99
Deductibility of payment to remove onerous obligation
 

The Court of Appeal has confirmed the Upper Tribunal (UT) decision that a payment to remove a personal restriction on an individual’s ability to sell his shares, so that another buyer could offer a higher price, was not enhancement expenditure and not deductible in computing the CGT due on the eventual sale (Julian Blackwell v HMRC [2017] EWCA Civ 232). 

In 2006 Mr Blackwell had paid £17.5m to be released from obligations made in 2003 to Taylor Francis Group concerning the way he would exercise his voting rights on shares in Blackwell Publishing (Holdings) Limited, including on a takeover. The First-tier Tribunal (FTT) had previously concluded that the 2006 payment was incurred in respect of the shares and that it enhanced their value by enabling the eventual purchaser’s bid to be accepted. 

The Court of Appeal agreed with the UT that the £17.5m expenditure did not affect the shares themselves, and could not be said to be reflected in the state or nature of the shares at disposal. As to whether the payment re-established Mr Blackwell’s rights over the shares, the court agreed with HMRC that the payment was for the purchase of rights of Taylor Francis over Mr Blackwell, not rights of Mr Blackwell over the shares.

From the weekly Tax update published by Smith & Williamson

94  Employee expenses 
 

Individuals who commence self-employment may also be employed for part of the tax year, or continue their employment alongside their new self-employed business. When completing their SA tax return you should check whether all their employment-related expenses have been reimbursed. 

Many employers do not reimburse their employees for the full amounts they spend on work-related expenses. The common areas where valid tax-deductible job-related expenses are incurred by employees include: 

  • business mileage in the employee’s own vehicle (claim approved mileage rates); 
  • fuel costs for business journeys in a company vehicle (claim advisory fuel rates); 
  • travel and overnight expenses; 
  • professional fees and subscriptions paid to bodies approved for tax  relief (‘List 3’); 
  • repairing or replacing small tools; 
  • cleaning, repairing or replacing uniforms, protective clothing or safety boots; and
  • flat rate expenses for certain occupations (see the Employment Income Manual at EIM23712). 

HMRC has drawn attention to the possibility of making such expense claims in Employer Bulletin 65. The employee’s claim can be made on their tax return, on form P87 submitted online or by post, or through the individual’s personal digital tax account. The amounts may be small but they are all welcome for someone on a tight budget. 

In the same article HMRC says it receives a lot of invalid claims for employment expenses. Apparently, employee expense claims have increased by 25% in the last five years, and the government is calling for evidence to discover the reasons why.

From the weekly newsletter of the Tax Advice Network

93  Reporting savings income 
 

In a recent meeting of our group, one member noted that savings income still needs to be reported on a self assessment tax return, no matter how small the amount, despite the personal savings allowance. Likewise, dividends covered by the dividend allowance still have to be reported.

So until HMRC starts pre-populating SA returns our work will not be reduced, and requests to clients for 2016/17 tax return information should ask for details of savings interest even if the total is under £1,000.

A member also pointed out that omitting this type of income from the return would depress the reported income which could be used to support a mortgage application.

Contributed by ICAEW Cardiff Town Group

84  New Online Trust register 
 

The draft regulations to apply in the UK for compliance with the Fourth Money Laundering Directive were published for consultation in 15 March 2017.

As part of the process for compliance with the regulations, a new online system is being developed for reporting new trusts to HMRC. Form 41G (Trusts) will be withdrawn from 28 April 2017 and any forms received by HMRC after 28 April will be returned. The online system will be available for trustees from June 2017 when the trust register requirements come into force; it is planned to be available in September for agents. In the meantime agents will have to stockpile new notifications.

As part of the process HMRC would like volunteer agents and trustees to work with them to develop the online system to help ensure that it operates in a way that is practical for agents and trustees. If you would like to volunteer, please contact Sue Moore

Contributed by Sue Moore

83  Updated R185 and Beneficiaries' Tax refunds 
 

Trustees are obliged to issue beneficiaries with an R185 showing the income distributed to them and the tax deducted. The form has been updated to reflect:

  • the changes in the taxation of interest (the personal savings allowance taxing interest of £1,000/£500/£0  at 0% for basic rate/higher rate/additional rate taxpayers);
  • and the dividend 0% rate band.

The R185 now explains that the beneficiary may be able to reclaim the tax paid by the trustees on interest and dividends.

Trustees do not qualify for the personal savings allowance nor do they receive the dividend 0% band. But the beneficiaries of interest in possession trusts will be able to benefit from the 0% bands on their trust income so tax paid by the trustees can potentially be reclaimed. 

Contributed by Sue Moore 

82  Residence Nil Rate band - new form 
 

The IHT residence nil rate band (RNRB) can apply to the estates of individuals who died on or after 6 April 2017. HMRC has published a new form, IHT435, to facilitate the claim

The RNRB was covered in detail in two articles by Helen Lewis in December 2016 and January 2017 TAXline. In brief, the pertinent points are as follows: 

A claim can be made if the deceased owned a residence that is to be inherited by his or her direct descendants (children, grandchildren etc); the definition extends to adopted children, stepchildren and foster children and also individuals for whom the deceased was their guardian and the spouses of the defined descendants. It can still be claimed if the deceased downsized to a smaller or no residence on or after 8 July 2015. The relief is only available on estates on death.

The nil rate band starts at £100,000 this year and will increase by £25,000 each year up to £175,000; it will then increase by inflation each year. 
It is tapered down by £1 for every £2 the estate exceeds £2m.

Any unused portion of the RNRB of a predeceased spouse/civil partner can be transferred to the second spouse/civil partner to die. If the first death was before 6 April 2017 they are assumed to have 100% of the allowance available subject to the taper for larger estates.

Contributed by Sue Moore 

81 Holdover relief: Connected persons 
 

There have been some interesting legislative interpretations recently. One of these arose in the case of Reeves v HMRC TC05680 in which the tribunal was concerned with a claim for holdover relief for CGT. Mr Reeves made a gift of an asset to a UK company and claimed holdover relief. However, s167, TCGA 1992 provides that holdover relief is not available if the company is controlled by non-residents. 

Mr Reeves owned the shares in the company but he was married and his wife was not UK resident. Husbands and wives are connected persons. So, if we consider the position of Mrs Reeves, she was connected with Mr Reeves and his shareholding could therefore be attributed to her. She was non-resident so it was possible to say that the company was controlled by a non-resident. Can you believe this? Try as they might, counsel for Mr Reeves could not get past the clear analysis of the legislation which denied holdover relief. 

The definition of connected person is very wide. It is a spouse, brother, sister, ancestor or lineal descendant – so if virtually anyone in the family is non-resident, holdover relief would be denied because that non-resident person could have the whole of the shares attributed to him or her.

The intention of parliament seems to have gone a bit AWOL here. It might of course be said that this extraordinary result was exactly what parliament intended – but that may be a minority view. If one looks at the reasoning of Lord Reed in UBS and DB in the Supreme Court, his formulation was that if the construction makes no sense and could not be what parliament intended, a purposive construction should be available to assist the taxpayer. Or to use the words of the Supreme Court more precisely, an appropriate purposive construction could be adopted to interpret the legislation in the light of the transaction which took place. 

It seems to me that the effects of this decision are so startling that some kind of HMRC practice or relieving procedure might be forthcoming (No, I don’t think so either).

Contributed by Peter Vaines, Field Court Tax Chambers

80  Irrecoverable loans and claims by executors
 

When an individual, or a company, makes a loan to a trading business and that loan is not repaid, the lender can claim a capital loss for the irrecoverable amount under s253, Taxation of Chargeable Gains Act 1992 (TCGA 1992). If funds were provided as a subscription for shares which have become worthless, the shareholder can make a negligible value claim under s24, TCGA 1992, which also creates a capital loss. Further, the s24 loss under can be set against income by claiming under s131, Income Tax Act 2007 (ITA 2007).

In HMRC v PL Drown and Mrs RE Leadley (as executors for JJ Leadley (dec)) [2017] UKUT 0111 (TCC), the Upper Tribunal (UT) considered whether the executors could make such loss claims on behalf of a deceased person.

Jeffery Leadley had invested in £25,000 in two different trading companies, receiving shares in return, and lent £334,784 to a third trading company. By 5 April 2010 all of those investments were worthless and Leadley could have claimed relief for negligible value for the shares and a loss under the loan to trader rules on his 2009/10 tax return. Unfortunately, Mr Leadley died in a road accident on 11 May 2010 before he could submit his 2009/10 tax return.

His executors completed his 2009/10 tax return and included claims for his worthless shares and loan. HMRC rejected those claims, arguing that only the taxpayer could make the claims, not the executors or personal representatives. The First-tier Tribunal (FTT) backed the executors but stipulated that loss from the loan could not be carried forward and set against gains incurred by the executors after the taxpayer’s death.

This makes sense, as the executors stand in the shoes of the taxpayer when completing the final tax return for his lifetime. You may think they should be permitted to make all the claims the taxpayer was eligible to make, had he lived to sign the return. However, the UT has now overturned the FTT decision for both reliefs.

A central part of the negligible value claim is that the taxpayer must hold the worthless assets at the time the claim is made. The UT held that the deceased and the executors are treated as different persons for CGT. As Mr Leadley had died by the time the claim was made, he did not hold those assets. The executors are deemed to acquire the assets at the date of death, so they owned the assets and could make the claim; but the assets were of negligible value when the executors acquired them, so there was no loss to claim. A similar argument applies for the irrecoverable loan.

Encourage clients to make claims for irrecoverable loans or worthless shares, as soon as possible, to ensure the loss doesn’t vanish on death. 

From the weekly newsletter of the Tax Advice Network 

75  Domicile of choice 
 

The recent decision of U v J [2017] EWHC 449 [Fam] was a family law case where the point at issue was the appropriate jurisdiction for a divorce. This depended on the domicile of the parties.

Both parties had foreign domiciles of origin and the question was whether either of them had acquired a domicile of choice in the UK.

The court considered the relevant test for the acquisition of a domicile of choice, specifically Rule 10 of Dicey (Dicey, Morris & Collins Conflict of Laws) which states: “Every independent person can acquire a domicile of choice by the combination of residence and intention of permanent or indefinite residence but not otherwise.”

Accordingly, as each of them had a foreign domicile of origin, this was the relevant test: had they been residing in the UK with the intention of permanent or indefinite residence here?

Naturally, the court conducted a detailed examination of the underlying facts. The judge explained that both parties had lived peripatetic lives for much of the last 20 years; he particularly made reference to “the fact that the Petitioner has lived in England only very temporarily and now some timeago”.

She was a student in 1995 to 1997 and then in a house with the respondent in multiple occupancy for about a year in 2001/02. Nevertheless, the court decided that she had lived in the UK sufficiently to acquire a domicile of choice here. Furthermore, the court decided that she had not lost her domicile of choice, notwithstanding her subsequent residence abroad.

This is an interesting conclusion and will be of value to anyone seeking to establish a domicile of choice outside the UK. However, I imagine that someone with a UK domicile of origin would find it difficult to persuade HMRC that they had acquired a domicile of choice in another country  on these grounds.

As far as the respondent was concerned, despite the judge being “satisfied that he did not see England as the place where he would ultimately retire”, it was held that he too had acquired a domicile of choice in England.

With the particularly high profile given to domicile matters just at the moment, this reasoning could prove useful in many cases. On the other hand, I guess there may be an appeal.

Contributed by Peter Vaines, Field Court Tax Chambers

64  Probate fees set to increase 
 

Despite the overwhelmingly negative response to its consultation in early 2016, the government has decided to proceed with its proposals to reform the fees for grants of probate or letters of administration. 

Although the threshold below which no fee is payable for applications for grants of probate will be increased from £5,000 to £50,000, the increases where fees are payable are high. In addition, the fees will be implemented on a banded structure, increasing in line with estate values, as set out in the table.

The government published a consultation on proposals to reform fees for grants of probate in February 2016. The response to the consultation was published on 24 February 2017, nearly a year later. ICAEW commented in ICAEW REP 61/16 that charging fees as a percentage of the estate is akin to a tax and is not representative of the cost of the service, and such a change should be made with proper parliamentary scrutiny and not by statutory instrument.

The level of fees is quite eye watering: for example, a fee of £8,000 for an estate of £1,000,001 which, once the residential nil rate band is fully in place, could attract an IHT liability of 40p. The top fee is £20,000 for an estate in excess of £2m.

As part of the changes there will no longer be any help with probate fees (though the Lord Chancellor will have discretion to grant remission in exceptional fee cases). The government response suggests various ways the fees might be paid, including that they could be paid by the executor out of their personal assets for later reimbursement! Who will choose to be an executor if that is expected of them?

Contributed by Sue Moore 

63  Gifts in memoriam
 

For some years now a reduced rate of IHT (36%) has applied to estates where at least 10% of the chargeable estate is left to charity. What is perhaps less often considered is that the same relief can apply if the destination of an estate is altered by deed of variation.

Suppose, for example, that Tom and Harriet are the joint inheritors of their widowed mother’s estate which totals £3m. In the normal run of things the estate will pay tax of £940,000 (assuming a ‘doubled-up’ nil rate band to be available) and the beneficiaries will each receive £1,030,000.

They could, however, jointly agree to vary the disposition of the estate and give a minimum of 10% of the chargeable estate (so, £235,000) to charity – perhaps a charitable trust set up in memory of their late parents. This would reduce the tax on the remainder of the estate to £761,400 so that Tom and Harriet would each receive £1,001,800. Bestowing a benefit of £235,000 on the charitable trust would thus have cost each of them just £28,200 – effectively giving tax relief at the rate of 76%. This may be a compelling reason to consider generosity to charity at a time of bereavement.

From Brass Tax published by BKL 

60  QROPS online service closing in April 
 

In February HMRC announced that the online service for managing qualifying recognised overseas pension schemes (QROPS) would close on 5 April 2017. 

Managers and administrators of pension schemes must report information to HMRC about overseas pension schemes, including transfers to and payments from QROPS. From 6 April 2017 they must use the existing forms and reference material to do this, as the QROPS online service will no longer be available.

We queried this with HMRC, as we wondered why QROPS reporting is moving back to a paper system when for so many other services HMRC’s strategy is firmly in the digital direction.

HMRC has explained that the reason is simply that due to the pace and volume of the changes made to the QROPS forms, it has not been possible to replicate these in the online system. Therefore, to avoid having to reject forms and ask for more information, HMRC felt that removing the service altogether would provide a better customer journey. 

As part of its wider digital strategy HMRC will be looking to provide an updated and more streamlined online service for QROPS in the future. 

59  Pension scheme surcharges 
 

Pension scheme rules are complicated, and they are constantly changing. It is thus essential that clients take advice from a qualified independent financial adviser before drawing funds from their pension scheme or using those funds to invest in business assets. Two recent First-tier Tribunal (FTT) cases provide cautionary tales.

In Rory O’Mara and Charlotte O’Mara v HMRC TC05609, Mr and Mrs O’Mara had a successful mortgage broking company. They took advice from a pensions adviser (Mr Lau) who they believed was registered by the Financial Conduct Authority, and they took steps to check his qualifications. 

Lau advised the O’Maras that they could transfer their pension savings into a ‘Bespoke Pension Trust’, which would lend the funds to their company to use for business purposes. Unfortunately, as the O’Maras controlled their company, a loan from the pension fund to their company was treated as a payment to them personally, as beneficiaries of the pension fund. This payment amounted to an unauthorised payment from the pension fund and attracted a surcharge of 55%. 

In Administrators of Wren Press Pension Scheme v HMRC TC05625, Wren Press was a small printing company that had a small self-administered pension scheme (SSAS). In September 2006 it arranged to sell its printing presses to the SSAS and lease the equipment back. This transaction was permitted under the rules that applied before 6 April 2006, but the A-day rules prohibited the SSAS from holding tangible moveable property. 

The directors of the company believed that the printing presses were fixed assets, as the lightest weighed around four tonnes and they could not be moved easily. However, the tribunal found that the printing presses were tangible moveable property as it was possible to move them. The sale and lease-back transaction thus triggered an unauthorised payment surcharge and a sanction charge for the pension scheme. 

From the weekly update published by the Tax Advice Network

58  Negative earnings: HMRC guidance 
 

In 2014, the Upper Tribunal (UT) decided that a measure of relief from income tax was available to a Mr Julian Martin who had received earnings that were subsequently clawed back by his employer (HMRC v Julian Martin [2014] UKUT 0429 – see practical point 199 in November 2014 TAXline).

Mr Martin had taken a job paying him a signing-on bonus of £250,000 with the proviso that some of it would be clawed back if he left the employment within five years. He did, and had to repay £162,500. Unless he was able to get a tax deduction for this amount, he was going to end up out of pocket because the amount repaid would exceed the net amount of the earnings. 

HMRC acknowledged that this could mean that the taxpayer could be worse off than if he had never had the bonus at all – but said it was nothing to do with it. HMRC just had to apply the law. It always says that when the unfairness is in its favour – but when it is in the taxpayer’s favour it complains like mad, usually claiming that it is “contrary to the intention of parliament”. A balanced approach would be welcome. 

Anyway, the tribunal judges said they were astonished that there was no guidance in the legislation about negative taxable earnings in s11, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), ie, what they are and how you calculate them. However, the tribunal could “barely think of a more obvious example” of negative taxable earnings than in this case. Although the amount repaid was not a loss, it could be deducted from Mr Martin’s other income in the same tax year. 

In a recent update to the Employment Income Manual, HMRC published some guidance on the subject of negative earnings, although this seems only to cover the circumstances of a clawback in the event of a resignation (see EIM00800–00845). However, there are an increasing number of occasions in the financial sector where a clawback may arise for other reasons, such as misconduct, where exactly the same considerations could apply. 

In addition, HMRC suggests that negative earnings must arise from an event relating to the employment so (for example) a payment for the breach of a restrictive covenant might not be eligible for relief. 

The guidance helpfully enables us to understand how HMRC is likely to approach the matter but there would still seem to be plenty of scope for disagreements (and unfairness) in this area. 

It may be that having regard to the obvious uncertainty (and potentially disastrous consequences) over the tax treatment of any such clawback, employees are likely to insist upon any clawback clause being calculated on a net basis.

Contributed by Peter Vaines, Field Court Tax Chambers 

51  IHT omissions 
 

It may be remembered that in 2010, in the FTT case of Fryer v HMRC TC00398, the question arose whether the deferral of retirement benefits by a pensioner represented an omission to exercise a right, giving rise to a transfer of value for inheritance tax purposes (IHT) by reason of s3(3), Inheritance Tax Act 1984 (IHTA 1984).

The taxpayer did not take her retirement benefits at her normal retirement date. She had no immediate need for the income. However, she died shortly thereafter. HMRC said that there was a transfer of value because there was a deliberate omission to exercise a right (her right to take her pension); her estate was diminished by the omission; and the value of someone else’s estate was increased as a result.

The tribunal said you just have to read the legislation and there was nothing to suggest that these conditions were not satisfied; the absence of any tax avoidance motive was irrelevant. She did not fail to exercise her rights by accident. A charge accordingly arose. This matter has been revisited by the UT in the case of HMRC v Staveley [2017] UK UT 004. The main issue was whether Mrs Staveley’s omission to exercise her right to take her pension should be treated as a transfer of value because, following her (untimely) death, the proceeds of the pension scheme went to her sons. The UT noted that although the sons’ estates would not have been increased in value but for her omission to take the benefits, that was not enough to satisfy the test. It
overlooked the fact that the payments out of the pension scheme were at the discretion of the scheme administrator and there was nothing to suggest that they had not exercised their discretion properly.

The proximate cause of the increase in the sons’ estates was the exercise of the discretion of the scheme administrator, not the omission by Mrs Staveley to take her pension benefits during her lifetime. This is a welcome analysis of the position, and an issue that must occur frequently. Many people do not take their pension rights immediately at retirement age and although the IHT issue is only likely to arise if they die before they do so, this would be a real hostage to fortune. They could fall ill at any time – and the last thing they would need is HMRC telling them to increase their estate for IHT by taking pension benefits that they don’t need.

Contributed by Peter Vaines, Field Court Tax Chambers

41  Fixed protection 2016 and Auto-Enrolment 
 

New regulations relax the requirement on employers to enrol employees in workplace pensions by providing a discretion in two further circumstances. These are where the individual employee has taken out either fixed protection 2016 or individual protection 2016.

This will be helpful for employees who have reached their lifetime pension contribution limit and taken out fixed protection 2016, as starting a new pension saving will mean this protection is lost. Fixed protection 2016 keeps the lifetime allowance at £1.25m, instead of the now applicable £1m. All contributions to defined contributions had to cease on 5 April 2016 for fixed protection 2016 to be effective. Individual protection 2016 provides a personal lifetime allowance between £1m and £1.25m, based on the collective value of pension holdings at 5 April 2016.

Pension savings can continue under this protection, but if the savings exceed the personal lifetime cap they will be subject to lifetime charges when withdrawn. While a 5 April 2016 date is relevant to both protections, there is currently no deadline for making these protections.

The regulations are the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2017, SI 2017/79, which come into force on 6 March 2017.

From the weekly Tax update published by Smith & Williamson LLP

40  Pension advice allowance confirmed 
 

The government has confirmed that pension scheme members can use £500 of their pension pot to access financial advice on their pension. This is linked in with the pension freedoms introduced over the past few years.

The £500 will be tax-free and will not be treated as part of the 25% tax-free lump sum from the pension. A member can access the £500 three times but no more than once in any tax year. The allowance has to be paid direct to the financial adviser. It can be used for advice face-to-face advice or online and, if appropriate, to cover the implementation fee.

There is no age limit on when the advice can be taken, which is good because a younger member may benefit more from advice as they will have the opportunity to increase their contributions if the pension fund is not going to produce the level of income they would like on retirement. Taking advice later in life may help the member secure a better deal with the funds they have but it may be too late to increase the size of the fund.

The allowance is not available to members of defined benefit pension schemes.

The government is also going to introduce an income tax exemption to cover the first £500-worth of pensions advice provided by an employer to an employee in a tax year and this tax-exempt sum can be combined with the £500 pension advice allowance.

Contributed by Caroline Miskin

39  Jointly held property: Form 17 
 

The Tax Faculty has been contacted by a conveyancer who is seeing an increase in the incorrect use of Form 17. We are sure most members are aware of the rules but thought it would be useful to issue a reminder. Form 17 is used by couples who are married or in a civil partnership when they wish to declare that property they jointly own is held in unequal shares, so that they are taxed on the income in those shares. In the absence of such a declaration the income from the property is shared 50:50. It can be used to declare shares where the couple hold the property as tenants incommon but not where they are joint tenants.

What is not always understood is that the ownership shares stated on Form 17 must be the shares in which the beneficial interest in the property is held.

As indicated on Form 17 (which can be found here): “If you live together with your spouse or civil partner, we normally treat income from property held in your joint names as if it belonged to you in equal shares and tax each of you on half of the income, regardless of actual ownership. Please complete this form if you want to be taxed on your actual shares. You will also need to provide evidence that your beneficial interests in the property are unequal, for example a declaration or deed of trust.

“Form 17 cannot be used to declare entitlement to income in a different share to the beneficial interest. Further advice should be sought if the rules have not been correctly applied.” Form 17 cannot be used to make a declaration about partnership income, income from shares in a close company, or income from the commercial letting of furnished holiday accommodation.

This procedure is likely to be of increasing importance for landlords from 2017/18 when the restriction on income tax relief for finance charges comes into effect. One way to mitigate the increased tax bill is to spread the income between spouses or civil partners, by changing the beneficial ownership and making a declaration on Form 17. For CGT purposes the gift will be at no gain/no loss provided the couple are living together in the year of the gift. A property held as joint tenants can be changed to ownerships as tenants in common.

The change in ownership must follow the correct legal procedure and be properly documented, and there may be non-tax implications; it may be wise to take legal advice.

30  Rectification of a trust deed  
 

The High Court has held that the failure of a trust deed to exclude the effect of s31, Trustee Act 1925 was a matter that could be rectified. Section 31, giving trustees powers to accumulate for minors, had adverse IHT consequences. 

In the case of Patricia Bullard v William Bullard and Virginia Faire [2017] EWHC 3 (Ch), Patricia Bullard was advised by her lawyers to enter into a double trust structure. This was set up in 2002 and consisted of:

  • an initial life interest trust for her in her house; and
  • an interest in possession trust for her children and grandchildren.

As these were pre-March 2006 interest in possession trusts, it was thought there would be no inheritance tax on their creation, in normal circumstances.

Section 31, Trustee Act 1925, however, was not excluded from the second trust. As there were minor grandchildren beneficiaries, the grandchildren’s interests were automatically replaced with accumulation trusts. This potentially led to significant IHT charges on creation.

HMRC declined to be joined into the proceedings but asked the court to consider Racal Group Services Ltd v Ashmore [1995] STC 1151. In Racal, Vinelott J commented, that for rectification, the court must be satisfied “that there is an issue capable of being contested, between the parties or between a covenantor or a grantor and the person he intended to benefit … and second that rectification is desired because it has beneficial fiscal consequences... [T]he court will not order rectification of a document as between the parties …, if their rights will be unaffected and if the only effect of the order will be to secure  a fiscal benefit.”

Here, the High Court considered there was convincing evidence that Patricia Bullard intended to create an interest in possession settlement. This was because she understood that if she did that there would be no immediate charge to inheritance tax. The judge was satisfied the conditions for rectification as set out in Racal were met. 

From the weekly Tax update published by Smith & Williamson 

29  New trust register 
 

Following hot on the heels of FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard), there will now be a trust register to comply with Article 31 of the Fourth Money Laundering Directive, which has to be implemented by June 2017. Article 30 of the directive deals with the public register for companies and limited liability partnerships, the requirements of which are met in part by the new annual filing of “persons with significant control” that replaced the annual return.

In 2017 HMRC will introduce an online trusts register which will provide a single point of access for trustees and their agents to register trusts and update their records. This will replace the current paper 41G form and the ad hoc process for trustees to notify changes in circumstances. The EU was proposing that the register should be for all trusts and should be public but the UK government is not keen on a full public register, taking the view that the UK register should be made available to appropriate authorities and it should only apply to trusts with a tax consequence. The actual format of the register is still being debated but by June 2017 it will be in place. It will be mainly for UK-based trusts but may also include non-UK trusts with a UK tax liability.

Information to be held will include the identity of the settlor, the trustees, the protector if applicable, the beneficiaries and any other person with effective control over the trust. If beneficiaries have been made known to the agent then they are expected to have the names and details of those beneficiaries. The directive requires that the register holds the name, address, date of birth and NI number of all beneficiaries.

The information will have to be provided when there is a tax consequence in the trust, which could be an income tax, capital gains tax, inheritance tax or stamp duty land tax liability. In conjunction with this there will be a new mandatory online registration process for trusts with tax consequences, to replace the form 41G. Details to be reported are the name of the trust, the date it was established, the value settled, where it is administered, and settlor and beneficiary details including name, date of birth, NI number and UTR. Information from existing trusts will be migrated across.

HMRC proposes to include a tick box on the self assessment return to confirm the trust register has been checked and updated and potentially a similar box will be included on the form IHT100. There will be more information on the trust register in the consultation on the draft regulations (expected in January 2017 but not yet published).

We will include details in our newswire.

Contributed by Sue Moore

27 Foreign currency assets 
 

The recent case of Knight v HMRC TC05544 provides another confirmation of the much-misunderstood capital gains tax position when a foreign asset is sold.

If I buy a house in the USA for $500,000 at a time when the exchange rate is £1: $1.50 and sell it for $700,000 at a time when the exchange rate is £1: $1.30, my capital gain is not $200,000 converted at 1.30 = £153,846. Unfortunately, that is much too simple and try as he might, Mr Knight was unable to persuade the FTT that this was the right result. It wasn’t and there was just too much authority against him – but you can understand why he said this was a sensible result.

It is necessary to recognise that foreign currency is a chargeable asset for capital gains tax purposes. That means you have four stages to consider:

  1. the acquisition of US dollars;
  2. the disposal of those dollars and the acquisition of another asset – the house;
  3. the disposal of the house and the acquisition of US dollars; and
  4. the disposal of the dollars and the conversion to sterling.

The acquisition and disposal of the dollars at the outset is unlikely to give rise to any gain or loss because that will occur within a very short time scale. The same may apply at the other end, when the property is sold. However, if there is a delay in the use of the dollars at the beginning or the conversion back to sterling at the end, a gain can arise on those occasions.

As far as the house is concerned it was bought for $500,000 when the sterling equivalent was £333,333. When the house was sold for $700,000 the sterling equivalent was £538,641. So the gain on the house for UK CGT purpose is £205,128 and not £153,846.

It works the other way too, of course, to create a (possibly unexpected) reduction in the gain if the exchange rate goes in the opposite direction.

Contributed by Peter Vaines, Field Court Tax Chambers

24  High Net Worth Unit: update 
 

HMRC’s High Net Worth Unit (HNWU) has historically handled the affairs of taxpayers with a net wealth of £20m or more.

As detailed in Agent Update 57, and following an announcement in the Summer Budget 2015, this approach has been extended to those with net wealth between £10m and £20m. HMRC explains that each taxpayer in the HNWU has a dedicated customer relationship manager (CRM) that they or their agent can speak to about tax issues. The £10m-plus net wealth customers are being dealt with by new teams within HNWU, and welcome letters are being sent out to taxpayers and agents with details of who their CRM is and how to contact them.

Over 2,000 taxpayers now being dealt with across the new HNWU teams and more are in the process of being brought in. Teams are based in existing HNWU offices in Bradford, Cardiff, East Kilbride, Washington and in a new HNWU site in HMRC’s Nottingham complex.

The HNWU uses a digital mail service whereby incoming paper post is scanned and allocated to the teams to handle. To ensure prompt receipt of post on the correct team and so post can be dealt with as quickly as possible, HMRC says it is important that the HNWU address and reference are printed clearly and correctly on any letters or other paper post.

The HNWU is also able to communicate with taxpayers or their agents by email, subject to written agreement from the taxpayer.

23  Scottish tax bands
 

You may have missed the important announcement in the Scottish Budget in December last year that certain income tax bands for Scottish taxpayers will differ from those for taxpayers resident in the rest of the UK. The income tax rates for Scottish taxpayers will be the same as others, but there will be differences in marginal tax rates when national insurance contributions (NICs) are taken into account. 

Assuming the Scottish Budget is passed as proposed, the basic rate band for Scottish taxpayers will be cut from £32,000 in 2016/17 to £31,930 for 2017/18. This cut is needed as the Scottish Government cannot change the level of the personal allowance but wants to increase the 40% threshold by only £430 rather than £2,000. 

As national insurance is not a devolved tax, the class 1 and class 4 NIC upper limits will be out of line with the 40% income tax threshold for Scottish taxpayers from 2017/18. This will create confusion, and a 52% marginal rate for Scottish taxpayers on employment income between £43,430 and £45,000.  To double the confusion the basic rate band of £31,930 will not apply for savings income, dividend income or capital gains tax (CGT) received by Scottish taxpayers. To calculate the level of the savings allowance, rate of dividend tax or CGT, the taxpayer will have to perform a parallel tax calculation using the tax bands applicable in the rest of the UK. Do you think your tax software will cope with that?

A Scottish taxpayer is defined by where their main residence is, but at present HMRC is taking this to be the taxpayer’s correspondence address as reported to them. Clients who have recently moved should update their address details with HMRC without delay. 

From the weekly newsletter of the Tax Advice Network

22  Update on personal tax account
 

The first anniversary of the personal Tax Account (PTA) fell on 14 December and during the first year it has been used by more than seven million taxpayers on more than 15 million occasions.

How can it be accessed?

The PTA is accessed using a Government Gateway ID. On the first occasion, some additional security questions must be answered and a mobile or landline phone number provided. Once the account is set up, future access is via the Government Gateway ID and a code sent to the registered mobile or landline is required on each login – this is known as two-step verification and is now compulsory. There is an option to access the service through the government-wide Verify identity assurance system but this is not generally recommended.

What services are available?

 Additional services are being added as the account develops but currently it can be used to:

  • check tax codes and individual PAYE records for current and prior years;
  • check and update company car and medical insurance benefit details;
  • check national insurance contribution records and state pension entitlement;
  • complete and file an individual (not business) self assessment tax return (this is only possible if the Government Gateway ID has been registered for self assessment);
  • renew tax credit claims or update tax credits circumstances as they change;
  • claim income tax refunds, which will be paid straight into the taxpayer’s bank account, pay a PAYE (P800) underpayment;
  • claim, check and update marriage allowance;
  • notify HMRC of a change of address; and
  • track forms that have been submitted online.

It is also possible to give a friend or family member access to a PTA as a ‘trusted helper’ but both parties have to go through the Verify identity assurance system which makes this difficult at present. 

Any pitfalls?

Feedback on the PTA is generally  very positive. The service is being improved and developed. The issues highlighted to the Tax Faculty have mostly been about problems with two-step verification – and frustration on the part of agents who do not have access to these services on behalf of their clients. Taxpayers are asked whether they wish to opt for paperless communication on their account.  We recommend that careful consideration be given to this question. Opting in to paperless communication will mean that no more paper is received and this includes self assessment payslips, coding notices, etc. Taxpayers who choose the paperless option receive an alert each time there is a new communication on their tax account.

Contributed by Caroline Miskin

7 Trustee in bankcruptcy cannot access bankrupt's pension

The Court of Appeal has recently upheld the High Court decision in Horton v Henry [2016] EWCA Civ 989, confirming that a trustee in bankruptcy does not have the power to access the pension fund of a bankrupt individual.

This decision clarifies the previous position, where there was conflicting case law.

This decision may be helpful where a bankrupt individual faces significant tax liabilities.

From the weekly Tax update published by Smith & Williamson LLP

6 Child benefit claims and loss of state pension credits

From a recent policy paper published by Royal London, The mothers missing out on millions, it seems that new mothers may have lost out on more than half a billion pounds in state pension rights in the last three years because of the complex rules which link the state pension to child benefit claims, and the effect of the high income child benefit charge (HICBC).

The HICBC, introduced in January 2013, means (broadly) that for a household in which child benefit is claimed and someone is earning over £50,000 a year, some or all of that child benefit will have to be paid back through the tax system.

To avoid the position where Mrs Smith claims for and receives child benefit, which Mr Smith then has to pay back because he is the higher earner, Mrs Smith can simply choose not to claim her child benefit. This may be a mistake as we shall see.

The new state pension can be claimed by a man born on or after 6 April 1951 or a woman born on or after 6 April 1953, when they reach state pension age. An individual will usually need at least 10 qualifying years on their national insurance contribution (NIC) record to be entitled to the new state pension; for the full pension they need a record of 35 qualifying years.

Most people will build up qualifying years by working and earning enough each week to exceed various NIC thresholds. But those who are unemployed, ill or a parent or carer may also get NIC credits. A person eligible for child benefit for a child under 12, usually the mother, can earn NIC credits – but only if she actually claims the benefit (though she doesn’t have to take payment of it).

What Mrs Smith should do, if she and her husband don’t want the bother of the HICBC, is to claim child benefit using Form CH2 but then tick the relevant section on the form to say she doesn’t want it paid. In fact, if she never returns to work at all, she will then continue to ‘earn’ qualifying years until her child is 12. If she has another child, she will need to go through the same process again if she wants to carry on accumulating qualifying years based on the age of her younger child.

Contributed by Anita Monteith

5 NAO review of how HMRC deals with HNWI

The National Audit Office (NAO) conducted a review in 2016 into the approach taken by HMRC to the collection of tax from high net worth individuals (HNWIs).

HMRC’s High Net Worth Unit (HNWU) was established in 2009. It deals now with individuals with assets in excess of £10m, reduced from £20m in 2016. At the start of 2015/16 there were 6,500 HNWIs representing about 0.02% of all taxpayers. Tax in excess of £4.3bn was paid by HNWI in 2014/15 representing 1.3% of the total take for income tax and national insurance and 15% of all capital gains tax.

Initially the HNWU concentrated on obtaining a better understanding of the circumstances of HNWIs but now it concentrates on the riskiest taxpayers. The risks are from tax avoidance, including the use of marketed tax avoidance schemes – 15% of HNWIs have used at least one scheme – and the legal interpretation of complex tax issues, rather than tax evasion.

1 Webinar on PCRT
The updated professional conduct in relation to taxation (PCRT) was published on 1 November 2016 and comes into effect on 1 March 2017.

The new version includes some important new standards that members must follow when advising on tax avoidance arrangements which build on the existing fundamental ethical principles.

A webinar presented by Nick Parker (ICAEW deputy president), Frank Haskew (head of ICAEW Tax Faculty) and Sophie Falcon (ICAEW Professional Standards), providing a general overview of the PCRT followed by a specific focus on the new standards, is available to view.

The webinar also addresses questions about how these standards are likely to apply in practice.

If you advise on tax, then you should watch this webinar.