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Restrictions on interest relief on buy to let mortgages – Section 24 of the Finance (no. 2) Act 2015

Restrictions on interest relief on buy to let mortgages – Section 24 of the Finance (no. 2) Act 201 

We have been receiving numerous queries from landlords and investors from all over the country in relation to the government’s proposed rules on restricting tax relief on finance costs to the basic rate. The general knee jerk reaction that we are noticing from these landlords is to consider incorporation as the new rules do not apply to limited companies. We have written about this in our previous tax update exploring the advantages and risks of incorporation relief. We also explored how incorporation does not help with mitigating inheritance tax. Those considering incorporating their property portfolios need to take into account what will happen if the government decides to apply the same restriction on financing costs relating to residential properties to limited companies as well. There are currently rumours in the market that as the additional 3% SDLT has been introduced for individuals and limited companies, the same is likely to be announced for interest relief restriction for limited companies. 

There are alternate structures available that can mitigate the income tax implications as well as capital gains tax and inheritance tax implications. Contact us for more details. 

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Property Tax Planning

Property Tax Planning

This client was referred to us from an accounting firm in London. The client has a large property portfolio and was seeking to reduce inheritance tax and capital gains tax on transferring the properties to his children. Our team of tax planning specialists proposed a structure that allowed our client to effectively transfer the properties to their children without any capital gains tax implications as well as significantly reduce or eliminate inheritance tax liability using the tax legislation, HMRC guidance and relevant case law.

Our analysis: The legislation and HMRC guidance on inheritance and capital gains tax is complex and seeking specialist advice can potentially save hundreds of thousands of pounds in tax for a small fee.

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Paradise Papers – Have you been a user of a tax avoidance scheme?

Paradise Papers – Have you been a user of a tax avoidance scheme?

The recent revelations known as Paradise Papers have highlighted the mass usage of tax avoidance schemes by wealthy individuals and corporations. These tax avoidance schemes are heavily marketed and promoted by some firms who charge a substantial fee for creating artificial structures. Our firm has been campaigning against such artificial tax avoidance schemes for years and have warned people not to use these schemes as they will ultimately get caught. This has happened several times over the years when various “unbreakable” tax avoidance schemes “with top QC/ Counsel opinions” have failed in the UK courts. We have helped many users of such schemes put their record straight so that they do not have to worry about getting caught every day. If you have used a tax avoidance scheme and would like to set your record straight, you can contact us on 0207 998 1834 for a free and confidential consultation.

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Complex VAT and Corporation tax investigation closed

Complex VAT and Corporation tax investigation closed

This client came to us from another accountant in South of England. The client ran a restaurant for a number of years and had been investigated by HMRC for underpayment of VAT and corporation tax. The client’s former accountant tried to deal with HMRC but the problems got worse and the tax liability increased. Eventually the case was referred to our firm. Having considered the case in detail and after discussions with the client and their previous accountant, we understood that the client’s business had been struggling since the recession and that our client had used other sources of income to fund his business. This approach was put forward to HMRC which was initially rejected. However, upon providing various forms of supporting evidence, HMRC accepted that there was no under declaration of income and that the correct VAT and corporation tax had been paid. HMRC decided to close the case without any tax to pay. We are grateful to HMRC officers involved for their pragmatic approach in this case. 

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McQuillan – [2017] UKUT 344 (TCC) – Entrepreneur’s Relief

McQuillan – [2017] UKUT 344 (TCC) – Entrepreneur’s Relief

In an most anticipated Entrepreneur’s Relief cases, the Upper Tribunal has reversed and dismissed the earlier decision by the First-Tier Tribunal. The FTT had ruled in 2016 that any shares with no rights to dividends had a right to a fixed dividend of effectively 0%. Since shares carrying a right to a fixed rate of dividend (even through 0%) are not ordinary shares for ER purposes, the FTT ruled that a company’s class of shares with no right to any dividend (which in practical terms were essentially a loan) could be ignored for the purposes of deciding whether the shareholders had a 5% or more shareholding for Entrepreneur’s Relief purposes. The Upper Tribunal disagreed with the decision of the FTT even though the result was obviously unfair and unintended.

The Upper Tribunal ruled that in order for the redeemable shares to be treated or seen as falling outside of the definition of ordinary shares in s989 there had to be some form of coupon or value attaching to such shares. In other words shares that had no specified right to any kind of a dividend could not be said to have a fixed entitlement to share in the profits of the company and therefore were deemed to be ordinary shares.

The Judge sympathised with the taxpayers’ unfortunate position and the outcome.

This Upper Tribunal case demonstrates the importance of careful reviews and specialist tax advice of a company’s share structure to ensure valuable reliefs are not lost.

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Strategic tax advice for a high net worth individual

Strategic tax advice for a high net worth individual

This case came to us from south of England following a recommendation. The client is a high net worth individual owning multiple businesses and properties. The businesses along with the property were being sold. Our client was looking for specialist advice on mitigating his capital gains tax position on sale of the businesses as well as his long term inheritance tax liabilities. Having discussed the client’s future preferences and business ventures, we were able to suggest a tax structure that would substantially mitigate his capital gains tax position on business disposal. The strategic tax structure would also allow for complete mitigation of substantial inheritance tax liabilities without triggering any further capital gains tax implication.

Our analysis: This was a complex case and required specialist knowledge of the tax legislation for capital gains and inheritance tax. There are a restricted number of areas where the legislation allows relief but due to the intricacies involved, these are difficult to follow through and implement.

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Interest relief restriction for landlords – Section 24 of Finance Act 2015

Interest relief restriction for landlords – Section 24 of Finance Act 2015

The new rules for restriction of tax relief for mortgage interest payments came into effect from 6th April 2017. The restrictions are being phased in over a period of four years. These changes mean that a large proportion of UK landlords will now start paying tax on rental income at a much higher rate despite their income remaining the same as previous years. This also means that there will be landlords who will run into cash flow deficit due to the increased amount of tax liability that is now payable.

The new rules under section 24 of Finance Act 2015 mean that landlords who are in the higher tax bands need to start seeking specialist tax advice on the structure of their property portfolio and ways to ensure the additional charge is mitigated. We at Churchill Tax Advisers have dealt with a number of enquiries from landlords that will be affected by the changes. There are a number of strategies that can be applied to the ownership structure and therefore gain a tax advantage.

We have been receiving numerous queries from landlords and investors from all over the country in relation to the government’s new rules on restricting tax relief on finance costs to the basic rate. The general knee jerk reaction that we are noticing from these landlords is to consider incorporation as the new rules do not apply to limited companies. We have written about this in our previous tax update exploring the advantages and risks of incorporation relief. We also explored how incorporation does not help with mitigating inheritance tax. Those considering incorporating their property portfolios need to take into account what will happen if the government decides to apply the same restriction on financing costs relating to residential properties to limited companies as well. There are currently rumours in the market that as the additional 3% SDLT has been introduced for individuals and limited companies, the same is likely to be announced for interest relief restriction for limited companies.

There are alternate structures available that can mitigate the income tax implications as well as capital gains tax and inheritance tax implications. Call us on 0207 998 1834 for a free and confidential consultation.

 

Read more

Property Tax Planning

This client was referred to us from an accounting firm in London. The client has a large property portfolio and was seeking to reduce inheritance tax and capital gains tax on transferring the properties to his children. Our team of tax planning specialists proposed a structure that allowed our client to effectively transfer the properties to their children without any capital gains tax implications as well as significantly reduce or eliminate inheritance tax liability using the tax legislation, HMRC guidance and relevant case law.

Our analysis: The legislation and HMRC guidance on inheritance and capital gains tax is complex and seeking specialist advice can potentially save hundreds of thousands of pounds in tax for a small fee.

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Churchill Tax Advisers successfully settles on an over £1m VAT investigation dispute with HMRC

This was a case referred to us by another firm of accountants in London. It involved the sale and leaseback of a property worth £6m on which an option to tax was exercised. Capital expenditure was incurred after the sale and leaseback and input VAT of £98k claimed under capital goods scheme. When HMRC came to check the claim, they found that there was an option to tax in place but no VAT had been charged on the sale. So instead of paying the £98k HMRC raised an assessment for £1.2m (20% of £6m). After reviewing the case and fact finding, we found that the option to tax was invalid from the outset as it was meant to be made after the sale had completed and that the accountants had made a mistake by backdating the claim to before completion. This argument was put forward to HMRC officers who had to consult with HMRC’s Policy Unit. The Policy Unit did not agree with our points raised and did not respond to our list of points raised or evidence provided. After several exchanges of correspondence over a period of 6 months, it became clear that, due to the size of amounts involved, HMRC were not prepared to discuss or reason on this matter. From our side we were confident that we had a strong case and were prepared to take this to the Tribunal. However prior to going to the Tribunal, we referred this matter to HMRC’s Alternate Dispute Resolution (ADR) team. Same points were raised with the ADR facilitator (who was very helpful, courteous and acted professionally) went back and forth between Churchill Tax and HMRC’s Tax Policy Unit for several weeks and kept asking for further information. Finally we received a call from the ADR facilitator that HMRC has now recognised that the option to tax was invalid from the outset and therefore no output tax was payable on the sale of the property. In addition HMRC will be contacting us shortly to discuss the re-payment of the £98k claim for input tax. HMRC have since issued letters confirming that the £1.2m output tax is no longer due and reversed the assessments raised. We are grateful to HMRC officers who have reconsidered their position and understood our client’s actual intentions in relation to the option to tax.

Our Analysis: In a case like this, it is crucial to ensure that the full background is available together with the commercial rationale before putting a technical argument to HMRC. We were once again very pleased with the role that was played by the ADR facilitator and positive steps taken towards resolving this dispute without having to resort to Tribunal proceedings.

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Churchill Tax launches a Specialist Tax Investigations Division

After years of continued success in the tax investigations sector, Churchill Tax Advisers have set up a new division called Churchill Tax Investigations (www.churchill-tax-investigation.co.uk ). The new division will have a team of highly qualified and experienced tax law specialists as well as ex- HMRC Senior Tax Inspectors. Churchill Tax Investigations will be focusing on serious tax investigation cases including Code of Practice 8, Code of Practice 9, Tax Evasion, Criminal Tax Investigations and VAT Fraud cases. There is a dedicated tax investigation hotline number for urgent tax investigation assistance and representation 0203 500 959.

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