Inheritance tax – don’t lose on penalties!

Lawpack on May 13, 2020

by Malcolm Gunn of www.taxinsider.co.uk

On the merger of the Inland Revenue with Customs & Excise to form HMRC, the decision was taken to harmonise the tax penalty regime across all taxes.

The net result is that in the fullness of time inheritance tax (IHT) penalties will, for the first time, follow the same pattern as the penalties applied to other direct taxes.

Failure to make a return

At present, late IHT returns do not incur any significant penalties until more than a year has elapsed from the due date and, even then, the maximum penalty is £3,000. This is set to change.

Although not yet implemented, the legislation has been passed to enable penalties of the greater of £300 or five per cent of the tax due to be charged for an IHT return which is six months late.

After one year, the penalty will be the greater of £300 or 70 per cent of the tax due on the return in cases where there has been deliberate delay but no concealment.

The 70 per cent figure can be reduced to 20 per cent if the return is duly made without prompting from HMRC.

These percentages are subject to a reduction for special circumstances, which HMRC says will only be given in rare cases, and there is also a reasonable excuse provision.

However, the basic message is that late IHT returns will quickly collect substantial penalties once this legislation is brought into effect for inheritance tax purposes.

Errors in IHT accounts

More penalties can be raised by HMRC where there are inaccuracies in IHT returns. These apply where the IHT liability arises on or after 1 April 2010, and given the sums which are commonly involved with inheritance tax, may amount to substantial figures.

The error must be due to careless or deliberate conduct. If HMRC discovers the inaccuracy first, and writes to prompt a disclosure about it, the minimum penalty will be 15 per cent of the tax involved.

The best way to ensure that this penalty is not incurred is to make any disclosure of errors as quickly as possible before HMRC discovers the inaccuracy. In that case, so long as the initial disclosure was not deliberately inaccurate, HMRC is permitted to reduce the penalty to zero.

HMRC has recently put out a statement to allay fears that this means that every correction to an IHT return should be disclosed individually as soon as it is identified.

Provided the corrections to a return do not: total more than £50,000, nor involve land or unquoted shares, and the case is not subject to a check by HMRC, notification to HMRC need only be made 18 months from the date of death or at the point when the estate is finalised.

Problem areas

Inheritance tax is full of all sorts of grey areas as to what constitutes a chargeable transfer and what does not. For example, HMRC is on record as stating that with transfers to employee benefit trusts, there can be an IHT charge, but this is disputed by experts in the field.

So one might take a decision not to make an IHT return in such circumstances contrary to HMRC’s published statement.

If it turns out that the expert opinion on the matter is wrong, and HMRC is right, it is possible that HMRC would then seek substantial penalties under the new provisions for failure to make a return. Obviously, one would vigorously resist penalties in such a situation, but it will be source of further dispute.

Practical tip

Clearly IHT returns must be made more promptly in the future and errors should be corrected before HMRC has the chance to point them out themselves.

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Published on: June 1, 2012

High earners: how to avoid the loss of the personal allowance and save tax at 60%

Lawpack on May 13, 2020

by Tony Granger of www.taxinsider.co.uk

The personal allowance is a valuable benefit as it reduces your taxable income. However, if you earn in excess of £100,000, then the personal allowance reduces as follows:

If your adjusted net income is over £100,000, you lose £1 for every £2 above the limit. At £114,950 earnings you are left with no personal allowance.

As you are losing your personal allowance on income above £100,000, combined with a tax rate of 40 per cent, your effective rate of tax on earnings between £100,001 and £149,950 is 60 per cent.

There is plenty of motivation to reduce your net adjusted income to below £100,000 to retain your personal allowance, and reduce your tax burden.

The current personal allowances for 2012-13 are:

  • Basic personal allowance: £8,105
  • Age 65-74: £10,500
  • Age 75+: £10,660

Tax rates for 2012-13 are as follows:

  • Savings rates 10%: £0 – £2,710
  • Basic rate 20%: £0 – £34,370
  • Higher rate 40%: £34,371 – £150,000
  • Additional rate: 50% over £150,000

Strategy 1: If you are married or in a civil partnership

If you have a lower taxed or earnings spouse, then consider transferring income-producing assets to them. You could save your personal allowance and use theirs more effectively.

The transfer must be outright and unconditional, and there is no capital gains tax (CGT) or inheritance tax (IHT) if you are UK domiciled and living together.

If a 40 per cent taxpayer and you transfer the income-producing asset to a non-taxpaying spouse, you save 40 per cent on interest income and 22.5 per cent on dividend income.

Strategy 2: If you have investments

Redistribute investment capital so that you can reinvest in tax-free investments, or reinvest in tax-efficient investments that produce no income – such as unit trusts and Oeics for growth, or investment bonds. Either try to produce less taxable income or invest for growth.

Strategy 3: Reduce your taxable income through pension contributions

Making a pension contribution (you can make gross contributions of up to £50,000 per annum unless you use carry forward of unused allowances from the past three years, where the total contribution in the current year could be up to £200,000) can save your personal allowance and give you tax back.

The following example shows how this works.

Assume taxable earnings of £120,000 per annum. Male age under 65.

What are the savings in terms of tax should you make a lump sum pension contribution?

Lump sum contribution of £21,000 gross, net £16,800.

Brings taxable earnings to £99,000.

Saves personal allowance of £8,105 (so tax saved on this at £3,242 at 40 per cent, but increased to £4,863 as actually saves 60 per cent, which is the effective tax rate between £100,000 and £114,950).

HMRC also pays back 20% x £21,000 = £4,200, as you are a 40 per cent taxpayer making a pension contribution. In addition, HMRC uplifts your net contribution of £16,800 by £4,200, so that the gross contribution is £21,000.

Total savings in tax: £4,863 + 4,200 = £9,063 for a net pension contribution of £16,800.

This strategy has saved your personal allowance and reduced your tax payable.

Strategy 4: Make charitable donations

Similar to pension contributions above, making charitable donations (gift aid payments) is currently unlimited (although there are steps being made by the government to cap this).

Charitable donations reduce net adjusted income, therefore allowing you to save your personal allowance if you are reducing taxable income to below £100,000. Tax relief is claimed by the charity – the payment is treated as being paid ‘net’.

A higher rate taxpayer may claim additional relief against income tax or CGT (the income tax claim is for the difference between the higher rate and basic rate (40 – 20 = 20%) on the total value of the donation. If you donate £100, the total gift to the charity is £125 as a gross donation. You get tax relief back of 20% x £125 = £25.

Some additional tax tips are that:

  1. you can elect for the donation to apply to the previous tax year;
  2. you can gift shares, securities, land and buildings. These all reduce your taxable income.

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Published on: May 1, 2012

Child Benefit – the changes explained

Lawpack on May 13, 2020

by Sarah Laing of www.taxinsider.co.uk

Following many months of speculation, we now know that Child Benefit will be withdrawn for some taxpayers by way of an income tax charge with effect from 7 January 2013.

This change will affect around 1.2 million families. Approximately 70 per cent of these households will lose all of their Child Benefit, and around 30 per cent will lose a portion. The average loss for those that lose will be roughly £1,300 per year.

It’s estimated that 90 per cent of families currently in receipt of Child Benefit will continue to receive some or all of their payments.

The tax charge

The income tax charge will apply to households (regardless of marital status) where a parent or partner has an ‘adjusted net income’ of over £50,000 a year.

This is an existing method of determining an individual’s income and is currently used to work out entitlement to personal allowances for someone aged 65 or over or who has income over £100,000.

See HMRC’s website for further information on working out ‘net adjusted income’.

Where each parent or partner has an income of over £50,000, the charge will only apply to the person with the higher income.

For taxpayers with income between £50,000 and £60,000, the amount of the charge will be a proportion of the Child Benefit received.

For taxpayers with income above £60,000, the amount of the charge will equal the amount of Child Benefit received. The amount of Child Benefit payable will be unaffected by the new tax charge.

The charge will be one per cent of the amount of Child Benefit for every £100 of income that exceeds £50,000.

Example

Based on a full tax year, Child Benefit for families with two children is currently £1,752. For a taxpayer whose income is £54,000, the charge will be £700.80, i.e. £17.52 for every £100 earned above £50,000. For a taxpayer whose income is £60,000 or more, the charge will be £1,752.

An individual who has income above £50,000 but is not entitled to Child Benefit themselves will only be liable to the charge for any period of the tax year during which they are living with a Child Benefit claimant whose own income is below £50,000.

Child Benefit itself is not being made liable to tax and the amount that can be claimed is unaffected by the new charge. It can continue to be paid in full to the claimant even if they or their partner have a liability to the new charge.

Child Benefit claimants will be able to elect not to receive the Child Benefit to which they are entitled if they or their partner do not wish to pay the new charge.

The claimant may subsequently decide to withdraw that election if they or their partner are no longer liable to pay the charge.

Practical tip

HMRC will be contacting people earning over £50,000 about the new charge from autumn 2012. The amount of the charge will be collected through self-assessment and PAYE. Individuals who think they may be affected by these proposals do not need to do anything now.

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Published on: May 1, 2012

Stamp duty changes mean big savings for buyers

Lawpack on May 13, 2020

by Nadine de Souza

In his Autumn Statement the Chancellor, George Osborne, announced that from midnight on 3rd December the way in which Stamp Duty is charged has changed.

Previously, Stamp Duty was charged at successively higher rates on the whole purchase price and had been called a ‘slab tax’ because of this. So, if you had bought a property for £250,000, you would have paid 1% Stamp Duty, but if you paid only £1 more on the purchase price you would have paid 3% on the purchase price, which is an extra £2,500 in tax.

As of 3 December, it’s now more like Income Tax, so the tax now rises progressively, and you will only pay tax on the amount of the purchase price that falls within the tax bracket. So, if you buy a house for £200,000, you will pay no Stamp Duty on the first £125,000 and then 2% on the next £75,000. This will mean a lower tax bill for most people.

The new rates are as follows:

  • Up to £125,000 – 0%
  • £125,001 – £250,000 – 2%
  • £250,001 – £925,000 – 5%
  • £925,001 – £1.5million – 10%
  • Above £1.5 million – 12%

The Government has said that anyone buying a property for less than £937,500 will now either pay less tax or the same amount of tax under the new rules.

Replacement of Stamp Duty in Scotland

In Scotland things are changing too. From April 2015 Stamp Duty is being replaced by Land and Building Transaction Tax (LBTT). There will be a tax-free allowance of £135,000. Then there are three bands:

  • Between £135,001 to £250,000 – 2%
  • Between £250,001 to £1million – 10%
  • Above £1million – 12%

With a house sold for £300,000, the first £135,000 would be tax free, then the next £114,999 would be subject to 2% tax and the rest would be subject to 10% tax. If you’re buying a property under £325,000, you would be better off, but if you were buying a property higher than this price then you would be worse off under the new system.

Other information

 

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Published on: December 5, 2014

Many landlords ‘rent out properties to top up pensions’

Lawpack on May 13, 2020

by Sarah Ashcroft

More than four in ten landlords have chosen to rent out properties in a bid to raise as much money as possible for their retirement.

A new survey conducted by the Property Investors Network (PIN) found that 42.4 per cent of landlords said that they bought rental accommodation to cover their pension pot, while 49 per cent admitted that it will provide a major part of their income in the future, reports the Dover Express.

With many people known to be getting a bad deal from more traditional investments and annuities, renting out a home can be a more appealing option.

Simon Zutshi, founder of PIN, said that there has been a loss of faith in certain financial institutions, leading many to believe that investment in bricks and mortar is the best way forward.

“The tales we’ve heard in recent years of highly paid bankers being utterly reckless with the futures of many, plus other tales of woe by those looking after our money, shows that the public should be entrusted with more control over their futures and self-invested personal pensions should allow residential property as part of a solid portfolio,” he explained.

Mr Zutshi went on to note that state pensions are “on the decline” and private pensions are generally not being invested in as much as they should be. This is causing a gap in the amount of money available to people in later life.

By investing in property and renting it out to tenants, people can be assured of a regular income. As long as it exceeds any mortgage payment they need to make, they will have some cash to put away each month towards retirement.

The performance of property has been impressive and gives individuals confidence they are safeguarding their future by acquiring it at the current time, Mr Zutshi noted.ADNFCR-1645-ID-801701467-ADNFCR

Published on: March 7, 2014

Bedroom tax to cut benefits for many households

Lawpack on May 13, 2020

by Sarah Ashcroft

One of the most controversial subjects in recent months has been the new Labour-dubbed ‘bedroom tax’ the government is introducing. Whatever your thoughts and feelings on the issue, perhaps the most sensible course of action now is to work out exactly how the change will affect you and your family.

The bedroom tax is part of the welfare reform promised by the coalition government and will see the amount of housing benefit dished out to certain people slashed. Individuals, couples or families who are deemed to be living in a property that is too big for them will have their allowance reduced so that it’s more in keeping with the amount somebody in their circumstances should be receiving.

Effectively, it’s bad news for those who live in a property that includes spare bedrooms, as these will be seen as going to waste and subsequently trigger a reduction in housing benefit. So if you live in a council property or housing association home, now is the time to consider how a change in benefits could affect you, as the measure is due to be implemented from next month.

When it comes to determining how many bedrooms a home contains, certain factors will be taken into consideration. For instance, all children under the age of 16 of the same gender will be expected to share a bedroom, while all under-tens – regardless of whether they are male or female – will also be deemed to be in one room.

All the spare rooms will then be added up and households will learn whether they will still receive the same benefits or face a reduction. Those who no longer qualify for the full amount will find that they lose 14 per cent of their housing benefit if they have one extra bedroom, while the total will go down by 25 per cent if they have two or more spare places to sleep.

It’s estimated that about 660,000 working-age social tenants will be impacted by the welfare reform, potentially resulting in many having to move to a smaller property in order to once again meet the rules for the full amount.

Parents who have separated but both have access to their children face one of the most important criteria of the scheme. Under the new rules, one parent will have to make themselves the ‘main carer’, meaning only they can claim benefits for an extra bedroom.

Other people who will be affected by the bedroom tax include foster carers, parents who have children visit but don’t live with them and families with disabled children. There are plenty of people around the UK who must consider the impact of a reduction in housing benefit.

It will be left up to landlords to determine what constitutes a bedroom and what doesn’t. This has already led to many tenants seeking to prove that certain rooms are not suited for sleeping.

Those who haven’t yet made arrangements to deal with a shortfall in funding will have to act quickly if they are to cope with the changes when they are introduced next month.

External links

Published on: March 27, 2013

Tax planning – timing is everything!

Lawpack on May 13, 2020

by Jennifer Adams of www.taxinsider.co.uk

There is a great deal of truth to be found in the statement that “Timing is everything” – the difference between a good joke and a bad one, for example, is a person’s sense of timing.

Timing and the recognition of timing also creates advantages and disadvantages in the field of taxation.

The date of purchase and subsequent sale of a property will make the difference between whether you make money/profit (and therefore possibly pay capital gains tax (CGT)), or lose money creating a capital loss (which can either be offset against the gain made from the sale of any other property during the same fiscal year or be carried forward to be used in future tax years).

Despite the reduction in value and sale prices of property currently prevalent as a result of the credit crunch, there are still some properties that stand at a capital profit which, if that profit is translated into a chargeable profit in excess of £10,600 per person per annum, can produce a CGT bill of either 18 per cent or 28 per cent of the gain made (depending upon the seller’s personal income tax rate).

As a 28 per cent CGT bill is more acceptable than a 50 per cent income tax bill (if the seller is an additional rate taxpayer), it’s always preferable for the gain for such taxpayers to be recognised as a capital rather than an income tax gain, if that can be achieved (best, of course, would be a NIL tax charge!).

CGT issues

‘Timing’ is thus all important, but practically what is most beneficial is not always easy to achieve.

With most assets, including property, the date of disposal for CGT purposes is the actual date of signature of contract even though the monies may not be debited from the purchasers’ bank account and the asset not conveyed, delivered or physically transferred until a later date.

If the contract includes any conditions or perhaps is subject to the exercise of an option, then the disposal will not occur until those conditions have been met.

Probably the worst feature of CGT is the many and varied rules for special cases – no other tax has quite so many complex reliefs for individual situations nor, indeed, so long a list of partial or complete exemptions as are found with CGT.

Despite this, tax planning is possible should a property be found to stand at a profit.

With any form of CGT planning, the principle of law determined in the tax case Furniss v Dawson ([1984] 1 All ER 530) should be at the back of the mind.

The principle is, broadly, that where a scheme is put into place comprising a number of steps, one or more of which has no purpose other than to avoid tax, then those steps are to be ignored for tax purposes.

So with this in mind, what comprises a tax planning exercise?

In order to save tax, it’s first necessary to identify when a tax charge actually arises. The basic rule is that before a transaction can give rise to a chargeable gain all of the following must be present:

  • A chargeable person; and
  • A chargeable asset; and
  • A chargeable disposal.

Generally, a ‘chargeable person’ is someone who is resident or ordinarily resident in the UK for at least part of the tax year (TCGA 1992, s 2(1)); a ‘chargeable asset’ includes all forms of property such as land, chattels and legal rights (unless specifically exempt). A ‘chargeable disposal’ occurs when ownership changes or part or the entire asset ceases to exist.

Having considered the above and thus identified that a charge does exist, it should then be possible to either bring forward or possibly delay the date of transaction to be taxed in whichever year is more tax beneficial.

If it’s planned to sell a property which will produce a gain but the property needs some work done on it, usually this is reflected in the price.

However, if the work is more improvement than repair in nature, it may be worthwhile undertaking just the improvement work to reduce the profit on sale thereby reducing the tax bill; possibly even calculating a spend that reduces the profit to just below the CGT annual exempt amount.

You would particularly want to do this if a loss is being incurred on the lettings received, as more repair costs will only increase the income tax loss to be carried forward which may then never achieve tax relief!

Repair or improvement?

The main consideration in this plan is the difference between what is deemed ‘repair work’ (a revenue item and thus allowable as a cost against rental income) and ‘capital improvements’ (a capital item not allowable against rental income but rather an expense for which tax relief is only possible when the property is finally sold).

The definition of a repair is not one that has a statutory footing — rather it takes the normal dictionary definition, although this is supplemented by case law on the distinction between repairs and capital improvements.

A ‘repair’ is really a restoration or a replacement of a particular part of a building, rather than of the whole building at one time.

A ‘capital improvement’ goes beyond a repair, i.e. more than just replacing like with like. If a roof is subject to storm damage, replacing tiles to take the roof back up to its original standard would be a repair; for example, however, taking off the roof and building another storey would be a capital improvement.

HMRC accepts that items such as mending broken windows, etc. would all normally be regarded as repair works.

However, the refurbishment or repair to a property purchased in a derelict state would be regarded as capital expenditure (the assumption being that buying a property in such a state would reduce the price of that property, hence the logic for the repairs to that property being regarded as capital in nature).

A problem area is when work is undertaken to a property that is intended to be repair work but includes an element of improvement. This often happens where building materials improve, making it impractical to replace like with like.

HMRC is generally realistic in accepting that the expenditure should be regarded as a repair rather than as a capital improvement.

This is provided that the improvement element arises only due to the upgrading of materials available, and any improvement to performance or capacity is small. Likewise, incidental improvements may often be treated as repairs.

Practical tip:

CGT planning should be an ongoing procedure for the whole of your property portfolio. Even if you are not intending to sell, the CGT gains or losses made on the portfolio need to be reviewed on an annual basis, and recalculated using current property sale values.

This will enable you to plan for any improvements that can be deemed as capital in nature which, when undertaken, will reduce any capital gain that might be due when a sale is finally made.

Related articles

 

Published on: September 1, 2012

HMRC launches tax cheat scheme in rental sector

Lawpack on May 13, 2020

by Sarah Ashcroft

Landlords operating within the private rental sector may want to warn their tenants about the dangers of failing to pay the correct tax on their rental agreements.

A new taskforce created by HM Revenue and Customs (HMRC) and launched in the south-east of England today (November 19th) is set to drive home the importance of keeping up-to-date with payments.

The body claims that it expects to recover almost £4 million as part of the investigation, which aims to ensure that individuals are unable to slip under the net by failing to part with the correct sum of money.

It comes as part of a governmental £917 million spending review investment to tackle tax avoidance, fraud and evasion in a bid to raise an additional £7 billion every year by 2014-15.

The move also includes task forces to investigate the alcohol industry in Scotland, as well as the rag trade – including wholesale, retail, textile recycling and manufacturing – in the north-west, North Wales and the Midlands.

Commenting on the launch of the scheme, exchequer secretary David Gauke said while the majority of people play by the rules, the HMRC will not tolerate the minority who fail to do so.

In addition, the official revealed that the body is currently on target to collect more than £50 million as a result of task forces launched in the UK in the last 12 months.

Landlords or residents who know of anyone who is deliberately avoiding paying tax have been urged to contact HMRC through its hotline, or via email or post.

Jennie Granger, director of general enforcement and compliance at HMRC, said: “HMRC is serious about tackling people who are not paying what they should. Anyone deliberately evading tax should watch out – HMRC is closing in on tax cheats.”

 

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Published on: November 19, 2012

Government announces plans for a new domestic violence law

Lawpack on May 13, 2020

by Nadine de Souza

The government has announced that it wants to introduce a new crime of domestic abuse. It wants to strengthen the law by explicitly stating that domestic abuse covers coercive and controlling behaviour as well as physical harm. There are lots of laws that cover violence, stalking and harassment but none refer to personal relationships, which is why this change would be a significant difference. It’s thought that if this becomes law, it will encourage more victims to come forward and report the crimes.

What the new offence will cover

The hope is that by introducing this new law and making domestic abuse a specific crime the police will be clearer about when to intervene. The offence would cover violence, emotional harm, incidents of psychological control which cut the victim off from friends and family, or prevent them from having access to money. The government wants to make it clear that domestic abuse is not just physical.

How ‘controlling behaviour’ will be defined

Controlling behaviour is defined as ‘a range of acts designed to make a person subordinate and/or dependent by isolating them from sources of support, exploiting their resources and capacities for personal gain, depriving them of the means needed for independence, resistance and escape and regulating their everyday behaviour’.

Some examples of controlling or coercive behaviour are: your partner preventing you seeing friends of family, constantly checking up on you or following you, uploading tracking software on your phone, accusing you unjustly of having affairs, humiliating or belittling or threatening you. If you feel frightened, change your behaviour because of your partner or feel like you can’t do anything right for your partner or are fearful of your partner’s reaction, then these are also signs of domestic abuse.

Thousands of victims are at risk

A report by Her Majesty’s Inspector of Constabulary showed that there are thousands of victims of domestic abuse at risk of serious harm because the police are failing to deal with offenders. It was found that the police were not taking domestic abuse, especially in its non-violent form, seriously enough. A Crime Survey for England and Wales suggests that 30 per cent of women and 16 per cent of men will experience domestic abuse during their lifetime.

Any new law would apply to offences committed by men or women and could result in a prison sentence.

Help from Lawpack

Unfortunately, violence and harassment is common in a divorce. If you’re experiencing this and want more in-depth information from a divorce lawyer about how to protect yourself as well as all other aspects of divorce law, then read our guide How to Get a Divorce by Punam Denley. Packed with tips and expert advice to ensure that you get through the divorce process smoothly.

All the divorce forms you need – and expert guidance on how to use them – can be found in Lawpack’s Separation & DIY Divorce Kit.

If you need assistance in completing the forms, then you can use our DIY Divorce Service who will complete them for you. With our Managed Divorce Service they will complete them and also file them at court for you.

Published on: August 26, 2014

Divorce now costing couples £44,000

Lawpack on May 13, 2020

The average cost of divorce for couples in the UK has now reached £44,000, according to new research by life insurer Aviva.

Divorce now costs £21,979 per person, a 57 per cent increase since 2006 when the same survey found the cost to be around £14,000 each.

Even though the legal costs of divorce have dropped from £1,818 to £1,280 due to online divorce services, the cost of divorce has still soared due to child maintenance payments and the cost of moving house.

40 per cent of those surveyed said that they were worse off since their separation and 53 per cent of couples took longer than six months to settle their financial matters, with it taking on average 11.5 months.

29 per cent of couples tried to reach an amicable settlement so they could save on legal fees, but 10 per cent continued to live together – even though they  had effectively separated – because they couldn’t afford to move out.

Six per cent had put off divorce altogether because the costs were too great.

How Lawpack can help

Lawpack has teamed up with Divorce Online to offer a range of fixed-price online divorce services, so if you’re facing divorce, you can keep your costs at a set price. We have three types of service:

  • DIY Divorce packages: Qualified divorce experts will complete the divorce forms for you
  • Managed Divorce packages: All divorce forms will be completed and filed at court for you
  • Solicitor Managed Divorce package: Qualified solicitors will complete and file the divorce forms for you, plus all telephone calls and letters are included in the fixed price of £399.

Published on: August 24, 2014