Capital Gains Tax

Transfer a Property to Children via a Trust

2 min read

There are a number of reasons that you may wish to gift an investment property to a trust rather than directly to your children. The two most common are Asset Protection and Capital Gains Tax.

From a tax perspective, it is important that neither you, your spouse nor any minor children are able to benefit from the trust. Typically a trust will be a discretionary trust with adult children and/or grandchildren being beneficiaries.

Asset Protection

As the trust owns the asset, it means that the asset can be protected and remain in the family as it does not form part of the beneficiary’s estate in the event of a bankruptcy, divorce or death. Additionally, the settlors can also be trustees, which means they will have a say on how and when funds or assets are distributed to beneficiaries.

Capital Gains Tax (CGT)

A gift of an asset to a child or to a trust is treated as a disposal at market value which, in the case of an investment property, would create a CGT liability based on the increase in value during its ownership. However, it is possible to hold over the gain on a disposal to a discretionary trust as it is chargeable to Inheritance tax (IHT) so that no tax is payable at this time.

Inheritance Tax (IHT)

The disposal to the trust is a chargeable lifetime transfer (CLT), assuming you have made no other CLTs in the last seven years each individual has a nil rate band of £325,000. A couple could therefore transfer a property valued up to £650,000 without incurring an immediate IHT charge (any excess would be charged to IHT at 20%).

As with an outright gift, if you survive the transfer by seven years it will fall out of your estate for IHT purposes. Every ten years the trust will be assessed to IHT based on the value of the assets in the trust at that time. If it exceeds the nil rate band/bands at that time the excess is charged to IHT at a rate of 6%.

It is possible at a future date to pass the property directly to a beneficiary and again hold over the gain for CGT purpose. There may be an IHT exit charge if there was IHT payable when setting up the trust if the transfer is within ten years of this event or, if not, IHT was payable at the most recent ten year anniversary.

Next Step

If you have any questions on gifting an investment property to a trust, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Your Guide to Furnished Holiday Lettings

2 min read

Much of the country is holidaying in the UK due to the current uncertainty around foreign travel, which has led to increased rents for UK furnished holiday lets (FHL). This article looks at the tax benefits of investing in such properties.

What is a Furnished Holiday Let?

In order to qualify a property should be fully furnished, commercially let and satisfy all of the following:-

Availability – It must be available for letting as furnished holiday accommodation for at least 210 days in the year.

Letting – It must be let as furnished holiday accommodation to the public for 105 days a year. You cannot include long term lets of more than 31 days.

Pattern of occupation – The total days where lettings exceed a continuous 31 days cannot exceed 155 days.

It is possible to average the days across properties where you have more than one FHL and you can make a period of grace election in certain circumstances when you have not quite satisfied the tests.

Income Tax

Capital allowances can be claimed on furniture and furnishings. You cannot claim relief on the original purchase of these items for ordinary residential lettings. There is greater flexibility for splitting profits with a spouse compared with ordinary residential lettings.

A significant advantage of FHLs compared with normal residential lettings is that there is no restriction on tax relief for interest payments for higher rate taxpayers.

Capital Gains Tax

Disposals of FHLs can qualify for Entrepreneur’s Relief which are taxed at 10% as opposed to the normal 18%/28% for residential properties. Gifts of FHL are deemed to take place at market value for capital gains purposes. An individual gifting a FHL can claim hold over relief so that no capital gains crystallize at that time.

This can be particularly beneficial for passing a FHL to the next generation as it is unlikely that a FHL will qualify for Inheritance Tax business property relief.

Capital Gains Rollover Relief is available where proceeds from the sale of a business asset are reinvested into another business asset. A FHL is a qualifying business asset. At Loucas, we help clients with a wide range of business interests including furnished holiday lets (FHL).

If you are considering buying a FHL or would like to discuss an existing property or portfolio, Loucas would be happy to advise on the matter.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Employee Ownership Trusts

3 min read

Employee Ownership Trusts (“EOT”) were first introduced in 2014 to facilitate more businesses being wholly or partly owned by employees.

There are some generous tax breaks on offer to encourage business owners to consider the EOT model.

What actually is an EOT?

A trust is set up which will hold all or some of the shares in the company. In order to benefit from the tax breaks the trust must own more than 50% of the shares in the company.

The trust will be operated for the benefit of the employees of the company. The trust is run by its trustees, which could include members of the management team, but given that its purpose is to hold the directors to account, it should be sufficiently independent to enable it to do this. It is necessary to demonstrate to HM Revenue & Customs that control of the business has passed to the EOT and having the trustees dominated by the original shareholders /directors would make this very difficult.

Employee Ownership Trust Model

How does it work in practice?

For new businesses, the EOT model could be put in place from the outset. For existing businesses, the shareholders would sell all or some of their shares to the EOT.

An independent market rate valuation of the business should be obtained which would set the sale price of the shares.

The company would make a contribution to the trust enabling it to pay for the shares. Depending on the funds available, a loan may have to remain between the trust and sellers which would be repaid over a period of time as the company generates future profits.

It may be possible for the company /trust to raise finance to help pay for the shares over a shorter period. The original business owners, post disposal, are able to retain some ownership in the business, keep their posts as directors and also receive market rate remuneration packages.

The company will continue to be run by the management team on a day to day basis, although they will now be answerable to the trustees of the EOT.

Tax breaks

Shareholders are able to sell their shares to the EOT free of Capital Gains Tax. With the recent reduction in Entrepreneur’s Relief this is even more attractive.

Income tax free bonuses of up to £3,600 per year can be paid to each employee.

What are the benefits of an EOT?

There are a number of benefits for the different business stakeholders.

Existing Business Owners

  • Capital Gains Tax free
  • Ready and willing buyer for the business
  • Reassurance that the business will continue as a going concern
  • Able to retain some ownership in the business

Employees

  • Tax free bonuses
  • A sense of ownership

The Company

  • An engaged workforce
  • Ensured long term future
  • Can continue with minimal disruption
  • A more innovative and forward thinking culture

The employee ownership model may not be suitable for all businesses, but it is fast becoming a popular choice for businesses who recognise the value of their most important resource.

An EOT is just one type of employee ownership model and other options such as share schemes should also be considered.

If you have any questions, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Capital Gains Tax

2 min read

Previously, disposals of UK residential properties are reported and any capital gains tax (CGT) calculated through your Self-assessment Tax Return.  The tax is therefore due for payment on the 31st January following the tax year of disposal.

What is changing?

This will all change for disposals of UK residential property after 6th April 2020 (the date of disposal is normally deemed to be the date of exchange). For these disposals, they must be reported to HM Revenue and Customs and the Capital Gains Tax paid within 30 days of the date of completion via the Capital Gains Tax on UK residential property service.

There is an exemption for the disposals where there is no tax to pay. Typically, these include properties that are covered by the main residence exemption; gains within the individual’s capital gains exemption or where there are losses from earlier capital disposals that reduce the gain below the exemption.

It is therefore vital to start collating information to compute the gain as soon as a disposal is anticipated.  In some cases, a disposal may require professional valuations to be obtained.

CGT liability

There are penalties for late filing of the information and payment of the Capital Gains Tax which follow the same rules as for self-assessment.

For those that do not normally file a Self-assessment Tax Return, there would be no need to do so in respect of the disposal. For those that do, they will need to disclose the gain on the Self-assessment Return as well.

When filing through the Capital Gains Tax in UK residential property service the tax payable is, in many cases, likely to be an estimated as it is not known the total income will be for the year or there may be later capital disposals the at affect the amount payable. The tax is therefore treated as a payment on account of the final liability which will be finalised either as an amendment via new service or disclosure of the final position on a self-assessment Tax Return.

The new rules apply to individuals, personal representatives and trustees.

How we can help

We are always on hand to answer any questions you may have about Capital Gains Tax. We can advise as to the best course of action in your own particular circumstances, so please do contact us.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

 

Investors’ Relief (IR)

1 min read

If you do not meet the criteria for Business Asset Disposal Relief (BADR) you may still be able to take advantage of the ow 10% rate of tax through IR.

Business Asset Disposal Relief (BADR) has been extended to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

  • shares must be newly issued and subscribed for by the individual for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for IR are subject to a lifetime cap of £10 million.

How we can help

We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us.

End of Year Tax Planning Tips

By Stuart Shaw

3 min readWith less than a month left of the current tax year, it is time to consider end of year tax planning opportunities.

Pension and Gift Aid contributions

Pension contributions and gift aid contributions made prior to the end of the tax year can help mitigate your tax liabilities – even more so when your income is near certain thresholds. For example, your personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This means that for the income band from £100,000 to  £123,700 the effective rate of tax is an eye-watering 60%. The flip side to this is that if your income is within this band you will get tax relief on pension contributions and gift aid payments at 60%.

Another scenario where additional relief is available is in respect to the withdrawal of child benefit. This occurs when the highest earner in the household’s income exceeds £50,000 and the benefit is clawed back at a rate of 1% for every £100 of income in excess of £50,000. The benefit is fully withdrawn when the individual’s income exceeds £60,000. Pension contributions and gift aid payments within this band of £50,000 and £60,000 will, therefore, attract a higher rate of effective relief. The rate of relief will depend on the number of children you are claiming benefit for.

Tax Efficient Investments

The end of the tax year is the perfect time to consider making tax efficient investments:-

ISAs

A range of ISAs are available to savers, including the Lifetime ISA for those under the age of 40; the Help to Buy ISA for first-time homebuyers; and the Junior ISA for individuals aged under 18.

Savers are able to invest in any combination of cash or stocks and shares, up to the overall annual subscription limit of £20,000. An individual may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Help to Buy ISA, one Lifetime ISA and one Innovative Finance ISA

Venture Capital Trusts (VCT)

These are investment vehicles that are invested in small higher-risk trading companies.

Investments in VCTs attract an income tax relief of 30% of the amount invested. This tax relief will be recouped if the investment is sold within 5 years.

Dividends and capital gains are tax-free.

The maximum annual investment for a taxpayer is £200,000.

EIS/SEIS

These are tax advantaged schemes that involve direct investments into small higher-risk trading companies.

EIS shares attract income tax relief of 30% and SEIS shares attract income tax relief of 50%. The relief is clawed back if the shares are sold or if there is a disqualifying event within 3 years.

Any gains on the shares are tax-free provided they are held for a minimum of 3 years and in most cases are fully relieved from Inheritance tax if held for two years.

In addition to the above, capital gains tax on gains invested in EIS shares where the relevant disposal was either 36 months prior to or 12 months after the EIS investment can be deferred until the subsequent disposal of the EIS shares.

The maximum that can be invested in EIS shares annually is £1M (or £2M for knowledge intensive companies) and for SEIS shares the limit is £100,000.

Inheritance Tax (IHT)

There is an annual £3,000 IHT gift exemption and you can also utilise any unused exemption from the previous year. Gifts covered by the exemption will fall outside of your estate immediately for IHT purposes.

There is also a £250 small gift exemption which allows you to give up to £250 annually to any number of friends and family. Again qualifying gifts will fall out of your estate immediately for IHT purposes.

Gifts to individuals that are not covered by the exemptions are potentially exempt transfers and you would have to survive the gift by seven years for them to fall outside your estate.

Capital Gains Tax

Each individual has a capital gains tax exemption of £11,700 for the year ended 5 April 2019. If it is not utilised then it is lost.

If you have investments standing at a gain you may wish to you consider making an appropriate disposal to utilise the annual exemption.

Alternatively, you may have already made gains in excess of the annual exemption and look to crystallize a loss prior to 5 April to offset against the gain.

Care should be taken if you are looking to bed and breakfast a share (i.e. sell the holding and then repurchase it shortly afterwards). If you repurchase the share within 30 days of the disposal then this purchase is matched with the recent disposal for tax purposes so is unlikely to crystallize a gain or loss as intended.

You could still dispose of a shareholding then immediately have your spouse purchase the same shareholding or alternatively, a SIPP could purchase the shares if you have one.

Loucas can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to you.  If you would like to discuss any of the issues raised in this guide please call 01622 758257.