The Ramsey Case, is it a business?

01 August 2018

The question as to whether there exists a property business or not for tax purposes is a key question for many taxpayers, until only a few years ago there was very little guidance or case law to assist in coming to an answer.

The case of ‘Elizabeth Moyne Ramsey V Revenue and Customs Commissioners (2013)’ in the Upper Tribunal, which went in favour of the taxpayer (Mrs Ramsey) can be seen to set a precedent, even though the case does not even draw an accurate ‘borderline’ for the rest to use when deciding whether a qualifying business exists or not. It is very important to understand that not all property investments will be classed as businesses and this will affect whether they will qualify for incorporation relief.

 Case Facts

·        Mrs Ramsey’s business consisted of a joint interest in a property which was divided into ten self-contained flats.

·        The property consisted of a communal area as well as a garden, car park and garages and a substantial repair and maintenance was carried out on them.

·        Mrs Ramsey was involved and carried out some the work personally.

·        Additional assistance was provided to an elderly tenets.

·        Mrs Ramsey was carrying out preliminary work for the planned refurbishment and redevelopment of the property prior to the transfer of the property to a limited company.

·        Mrs Ramsey and her husband each spent 20 hours a week on the management of the property business and neither of them had any other source of income during the relevant period.

Decision

In summing up the judge said “that the activity undertaken in respect of the property, again taken overall, was sufficient in nature and extent to amount to a business for the purpose of [incorporation relief]. Although each of the activities could equally well have been undertaken by someone who was a mere property investor, where the degree of activity outweighs what might normally be expected to be carried out by a mere passive investor, even a diligent and conscientious one, that will in my judgement amount to a business.”

Although Mrs Ramsey qualified, the judge made it clear that other owners of investment property might only be ‘passive investors’ and not qualify and it comes down to degree of activity undertake by the investor.

The relevant factors from the case & moving forward

The degree of activates is the main point when it comes to qualifying or not, Mrs Ramsey spent 20 hours a week working on the property business and this was found to be sufficient to indicate that a business was being carried out and HMRC were giving pre transaction clearance based on this until recently, however we have been informed that unfortunately HMRC have now stopped issuing these clearances because of the huge number of such applications.

This creates a real problem for anyone that is unclear whether or not according to the legislation their portfolio would qualify as a business or not.

It would be very unfortunate to go ahead with moving their properties into a limited company only to find out that HMRC does not agree with the incorporation relief claimed and the individual is left with potentially a massive ‘dry’ bill (dry bill is where an individual is treated as though they have made a gain even though no actual money was received to pay the bill) and it’s too late to undo the transactions.

Limited companies are not the only way to mitigate the potentially devastating effects of the changes introduced.

If you would like any assistance or have any questions about incorporating your portfolio please contact us or get in touch today by calling 0203 039 3993.

Am I entitled to the Personal Allowance if I’m a Non-Resident?

21 May 2018

We often get asked by potential clients who are non-resident to check they are entitled to the personal allowance, this seems to be one of the most common areas of concern.

Non-residents UK income is chargeable to UK income tax, and gains on certain UK asses, predominantly UK situ residential property, is chargeable to UK capital gains tax.

The following non-residents are entitled to the personal allowance:

  • a citizen of a state within the EEA
  • a resident in the Isle of Man or the Channel Islands
  • someone who was previously UK resident and is now resident abroad for their health or the health of a member of their family who lives with them
  • a current or a former employee of the British Crown (for example a civil servant, a diplomat or a member of the armed forces)
  • a civil servant in a territory under the protection of the British Crown
  • a UK missionary society employee
  • a widow, widower or the surviving civil partner of a former employee of the British Crown

This is a very wide group and covers most client’s and potential clients that we talk to.

If you don’t qualify as you fall under the above headings you may also qualify under the terms of a double tax treaty. The UK has double tax treaties in place with many countries, HM Revenue & Customs publish a handy digest of the countries covered, this can be found here.

Some notable countries whose residents are not granted the UK personal allowance include: USA, Mexico, and the United Arab Emirates.

If you are a British Expat, or Non-Resident and need any assistance with your UK tax liabilities then please contact us or get in touch today by calling 0203 039 3993.

April 2019 Loan Charge – Where are we now?

23 April 2018

The Finance Act 2018 received Royal Ascent on 15th March 2018 bringing into law the “Loan Charge” which imposes a tax and potentially a national insurance charge on anyone who has an outstanding balance at 6th April 2019 on a disguised remuneration loan taken out since 6th April 1999.

There are many complexities as to how this charge will be applied but essentially if you have used a contractor loan arrangement and the balance has not been repaid before 6th April 2019 then the balance is taxed upon you as if it were income arising on 5th April 2019, ie in the 2018/19 tax year.

As the amount is assessed as one lump sum amount it will only benefit from one year’s worth allowances and tax bands despite the fact it may have arisen over a number of years. Tax will be payable along with the taxpayers other income for the year and it will be taxed as if it were a payment caught under Part 7A of ITEPA 2003.

On 7th November 2017 HMRC announced a settlement opportunity enabling those affected to settle on preferential terms, broadly treating the loans as income within the years they arose, this is likely to result in a lower charge than that under the loan charge. Penalties and interest will also however need to be considered.

To take advantage of the settlement opportunity those affected need to register their interest with HMRC by 31 May 2018, then provide HMRC all the information necessary to calculate the tax and national insurance due by 30 September 2018. HMRC have also confirmed payment plans will be an option.

If you don’t take advantage of the settlement opportunity what are your option?

Firstly, you can pay the loan charge, there will be no penalties and interest as long as it is paid by the due date.

As to the due date the liability initially falls upon the employer, or if the employer is offshore upon the client. If the employer or the client are unable to pay then HMRC will issue a Regulation 81 notice shifting the liability onto the worker. This could therefore be payable as early as 6th June 2019.

However, if the employer no longer exists then the liability is reportable on the workers 2018-19 self assessment. In this case the liability will be payable by 31 January 2020.

Secondly, you could pay back the loan, it is likely that once repaid the funds will be available to be distributed to you in a taxable form, some (within the annual limits) may be contributed tax efficiently into your pension funds.

Finally, you may be able to enter into a further arrangement such that the loan charge does not apply, however if you do so you need to have good reason as the loan charge legislation has been drafted widely to eliminate the possibility of planning around the charge. HMRC have categorically stated that any scheme designed to avoid the charge will fail, any arrangement entered into therefore needs to have genuine commercial substance.

Over the last few years HMRC powers have widened significantly, and there are some hefty new penalty provisions. For example, new penalties have been imposed for offshore evasion, penalties of up to 200% of the underdeclared tax could be imposed. Along with this new penalty comes the requirement to correct underpaid tax liabilities for offshore interests before 30 September 2018 otherwise the full force of the new penalties will be imposed.

Most contractor loan arrangements were backed by tax Counsel opinions that they did not give rise to a tax charge. However, the Loan Charge negates these opinions by creating a second tax point on these loans on 5th April 2019. At worst being involved in these arrangements could originally have been considered avoidance by HMRC, but with the lines between avoidance and evasion blurring ignore the Loan Charge at your peril.

If you would like any assistance in quantifying your exposure under the loan charge, or quantifying and settling under the settlement opportunity then please contact us or get in touch today by calling 0203 039 3993.

Passive Property Profits, Property Income or Not?

12 February 2018

Profits from property are taxed to either income tax or capital gains tax, depending on the nature of the transaction.

Normally it is clear which tax should apply, but there are certain circumstances where it’s not so obvious.

Passive property profits are earnings that are neither from property investment nor from a property trading business.

Property investment is where a business holds properties as long term asset and earns rental income, while a property trade is where a business holds properties as short term trading stock, hoping to make a quick profit from the margin between the buying and selling price of the properties.

Key features of passive property profits are:

·        As you would expect the investor plays a passive role in the transaction

·        Transaction is entered with the expectation of short term profits

·        Profit is achieved from a disposal of the investment rather than an income stream

Let’s try to explain this further in the example below.

In this case the investment is an existing interest in a property that ceases to be a long-term investment and becomes subject of a passive property profit transaction.

Alan is approached by his friend Tony with an idea to build a second house in his rather large garden, Tony promises Alan to give him a quarter of the sales proceeds made on the development.

The part of the garden used for development is valued at £25,000 before construction and the new development is sold for £300,000 making Alans profit of £50,000 (£300,000 * ¼ - £25,000).

Because Alan’s share was dependent on the final sales proceeds of the new development, the profit will be treated as income in nature rather than a capital gain.

Alan’s role was totally passive in this scenario as he did not participate directly in the construction of the new development and as a result Alan cannot be regarded as a property trader which makes the £50,000 profit made a “passive property profit”.

Most people in Alan’s position would prefer this profit to be treated as a capital gain rather than income. This is so they can utilize their annual CGT exemption of £11,300 against their profit and the reminder would be taxed at either 18% or 28%, subject to main residence relief. However because Alan took a share in the development of the new development, his profit cannot be treated as a capital gain.

If Alan had sold his extra land for a fixed price of £75,000 then it would have been subject to capital gains tax instead, again potentially subject to main residence relief.

Passive property profits are “other income” for tax purposes, so it’s not taxed as property income nor as trading income, however it is subject to income tax at the usual rates.

When Alan gave the land to Tony the value of the land was £25,000 however if the original cost was lower, then Alan would need to account for the capital gain on the land separately to the £50,000 of profit made on the development of the land.

One upside of passive property profit is that since it’s not a trade it should not attract National Insurance, which is a saving of 9% or 2% depending on the individual’s circumstances.

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

 

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