Issue 44

We are told that winter is when the axis of the Earth in the respective hemisphere is oriented away from the Sun.  That’s why, at this time of year, you particularly need a Square Circular to put a little sunshine into your day.

As usual, we cover a few different topics, although this Issue, the emphasis is on Inheritance Tax and property ownership.

If you want more details about any of the matters we’ve mentioned in this issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.

WHAT’S NEWS?

Budget Day is scheduled for Wednesday 19 March.  More action packed fun with George Osborne!

NO NEWS IS GOOD NEWS

If you think back to the autumn Square Circular – not that long ago in 2013 – you may remember an Article about possible changes to the tax treatment of loan accounts with your company if the loan account is overdrawn.  A number of options were mentioned by HMRC in a consultation document including a “do nothing” option.

Believe it or not, that’s the one they’ve gone for.  At least, in the 2014 Finance Bill, we’re not expecting to see any changes so that’s good news.  And next year or the year after?  We’ll have to wait and see.

♫ DUM DE DUM DE DUM DE DUM ♫

Here’s some real news.  The ageing matriarch Peggy Woolley, in The Archers, created a bit of a stir when she announced her plans for eventually disposing of her estate.

Her daughters, Jennifer and Lillian are both well-heeled and don’t need Peggy’s money.  So that leaves her son, Tony and his family, wife Pat and children, Helen and Tom.  Rather than leaving her wealth to Tony, the plodding and hard-working farmer of Bridge Farm, Peggy intends to benefit Helen and Tom.  She’s going to leave Helen “The Lodge”, a property which will give Helen future security and pretty much everything else to Tom, who is something of an entrepreneur, and who has a real vision for the future of Bridge Farm.  Pat and Tony seem somewhat put out to say the least.  Poor Tony feels by-passed, and unappreciated by his own mother.

What does the Square Circular make of all this?  Peggy’s plan to skip a generation is text book Inheritance Tax planning.  Brilliant move, as long as the third generation is responsible enough to handle the wealth and the second generation is not so emotionally fragile as to begrudge being passed over in favour of their children.

Care to join our Inheritance Tax planning team Peggy?

MAKING A SELFIE

Apparently, selfie was the word of 2013.  You probably think that making a selfie is taking a photograph of yourself.  That’s taking a selfie.  Making a selfie is somewhat different and you don’t need a cell phone to do it.

Here’s an Inheritance Tax (Ih.T) problem. You’ve got an abundance of assets, for example, buy to let properties or equities.  You want to pass them on to the next generation.  The only thing is, you need the income from those assets, rent or dividends, yourself, to live on.  So what can you do?

Make a selfie, or rather we should say, a self-settlement.  You put assets into a life interest trust for yourself with remainder to your children.  If the value of the assets is below the £325,000 nil rate band there’ll be no immediate Ih.T.  You’ll still get the income from it.  The arrangement is rubbish for income tax purposes, but that’s not the purpose.  For Ih.T purposes it gets wiped off your Ih.T clock after 7 years but you can still enjoy the income from the trust property. And spouses can double their money by putting up to £325,000 each into trust without Ih.T consequences.

Another whizzo wheeze.  Get in touch with us on 0161 832 4841 if it fits your situation.

CAPITAL GAINS FLIPPING

As widely anticipated, we are to get legislation to say that as from April 2015 there will be a charge to CGT on future gains made by non-residents disposing of UK residential property.  Maybe we’ll talk about that in a future issue.  More imminent (April 2014) and less expected was the proposal to be introduced in the 2014 Finance Bill to reduce the final period of exemption from 36 months to 18 months.

We’re talking about the Principal Private Residence (PPR) relief. If a property has been your PPR at any time, the last 36 months are exempt.  A particularly popular trick was that of “flipping” where you made an election for a property to be your PPR if only for a short period of time and that would qualify you for a 36 month exemption period at the end. Ask your local M.P. for further information!

With the exempt period due to be reduced from 36 to 18 months if you are thinking of selling such a property you may want to get the sale in before the end of the current tax year.  This is especially the case if the ownership or occupation period was relatively short and the 18 month reduction can have a disproportionate effect on your tax position. What’s more, if you’re in the frame for claiming letting relief which can be capped at the exempt proportion of the gain, the proposed 18 month reduction can have a knock on effect on that letting relief.

If you may be affected and your CGT position needs re-calculating feel free to call us for help.

COMMERICAL PROPERTY ALERT

Here’s just a quick reminder of a rule change which is old in the sense that it was announced some time ago, but is new, in the sense that it starts in April 2014. 

After April 2014 if you sell a commercial property but didn’t pool or didn’t claim first year allowances, the purchaser can’t make a claim for capital allowances. This could affect the value or marketability of your property.  Put it this way, if you were a buyer and had a choice between two similar properties at a similar price, one on which you were able to claim capital allowances in the future and one not, which would you choose?

OK; you’re not intending to sell your property just yet but you’ve only got a few weeks in which to think into the future.

STILL ON THE SUBJECT OF PROPERTY

A perennial question we’re asked about buy to let properties is whether they should be owned and rented out in personal names or whether they should be held within a company.   And, as is often the case those who want a categoric yes or no answer are going to be disappointed because the correct answer is that it all depends.

Is the rental activity carried on more as a passive investment or more as a commercial business activity?  Do you want or need to draw out all the profits of the rental business?  If you do, are you able to be flexible as to when you draw out those profits? If you don’t, do you want to expand by buying more rental properties?  Do you want to draw money out of your property rental business by re-mortgaging (as long as the mortgage is below the market value of the property when first let)?

These are just a few of the pertinent questions on which “it all depends”.  Fortunately, most of you property owners know to discuss these issues with us.  If you don’t know to do so or you know people who would benefit from a discussion with us, please do call us on 0161 832 4841.

PLAN NOW OR WORRY LATER

New rules from April 2014 for partnerships where one of the partners is a company and for fixed share members of LLPs.  If you’re affected, planning now can save worrying later.

THAT’S NO JOKE

Did you hear the one about the chap who invested in a bond divided into a number of life insurance policies?  When it came to surrendering part of his investment he ticked the box to make a partial surrender of all the policies rather than a full surrender of some of the policies.  He ended up with more than he’d bargained for in terms of tax liability.  A lot more!  That’s no joke!

It just goes to show that you need both a smart accountant and a smart IFA.  When faced with big financial decisions such as which box to tick it’s worth first speaking to us or Paul Stones of Pareto Alexander.

TAX GAPS

According to HMRC’s 2013 edition of “measuring tax gaps” the gap is increasing, particularly, it seems, for VAT.  The tax gap is the difference between the tax that HMRC actually receives and what it believes it should receive.

What would you do if your business had a gap between anticipated and actual revenue. You’d investigate, wouldn’t you? You’d see what you could do to close that gap.  We’ve heard how HMRC have been trying to bridge the gap in the field of direct tax and now VAT gurus are predicting increased HMRC activity in the field of VAT investigations.

Be aware.

AND FINALLY

Our church notice board “and finally” in last time’s Square Circular proved more popular than a quotation about tax so here’s another.

“Ladies, don’t forget the rummage sale.  It’s a chance to get rid of those things not worth keeping around the house.  Don’t forget your husbands.”