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EIS & SEIS

If you are a director of a company seeking to raise finance, or if you are interested in investing in shares, you should consider the valuable tax relief available under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

EIS and SEIS were introduced to encourage individuals to invest in smaller, high-risk companies. They offer generous income tax and capital gains tax benefits, namely:

Income Tax

  • EIS Shares – a reduction of income tax of up to 30% of the lower of the amount subscribed or £1mllion (i.e. maximum relief of £300,000.
  • SEIS Shares – a reduction of income tax of up to 50% of the lower of the amount subscribed and £100,000 (i.e. maximum relief of £50,000).

Capital Gains Tax

  • No capital gains tax on the sale of EIS & SEIS shares, provided that the investor owned the shares for at least 3 years prior to sale and income tax relief was claimed.
  • EIS reinvestment relief, which allows an individual to defer the capital gains on sales of other assets if they reinvest the proceeds in qualifying EIS shares.
  • SEIS reinvestment relief, which allows an individual to exempt a portion the capital gains on sales of other assets if they reinvest the proceeds in qualifying SEIS shares.

EIS & SEIS: What’s the difference?

EIS and SEIS are both aimed towards unquoted companies looking to seek investment to further their trade.

The conditions for qualifying for EIS and SEIS are broadly similar, however as SEIS focuses on high-risk early-stage companies, the rules are more restrictive.  A brief summary of some of the conditions that must be met include:

EIS SEIS
Must not be carrying on certain prohibited or excluded trades (e.g. legal and accountancy, farming, property development). Same as EIS
Must be an unquoted company Same as EIS
Must not be controlled by another company Same as EIS
The assets of the company must not exceed £15 million before the share issue, and £16 million after the issue The assets of the company must not exceed £200,000 before the share issue
Must have fewer than 250 full-time employees (or 500 for knowledge intensive companies) Must have fewer than 25 full-time employees
The funds raised from the share issue must be spent on a qualifying business activity within 2 years of issue/commencement. Same as EIS, except the deadline for spending the funds raised is extended to 3 years.

 

Share issue must take place within 7 years of the first commercial sale made by the company (10 for knowledge intensive companies) The business activity carried on by the company must not be more than 2 years old.
Shares must be ordinary shares which do not carry preferential rights Same as EIS

How can we help?

There are strict conditions that apply to the company, the shares, and the investor(s) that must be met in order for EIS/SEIS to apply. We have assisted our clients by performing a detailed review of the rules and advising on whether they could qualify under EIS/SEIS.

Businesses looking to utilise EIS/SEIS for their company must send certain forms and information to HMRC to allow HMRC to certify that the company shares qualify for tax relief. We can help prepare the appropriate documents to put forward the best case for why a company will be eligible.

HMRC also offers advance assurance so that directors and investors can be certain that the company’s shares will qualify for EIS/SEIS before they are issued. We can also prepare these advance assurance claims to provide further comfort for clients.

EIS and SEIS investments carry financial risk and should only be undertaken after speaking with a qualified financial advisor.

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Property Taxes

If you are a landlord letting out property in the UK, then it is important to consider your responsibilities with respect to reporting income and/or gains on your property and paying any tax due.

By taking pro-active advice, you may be able to reduce your tax bill – particularly where you are selling property or considering expanding your property portfolio.

If you receive rental income from a tenant, either from a UK or overseas property, then you may be subject to income tax on your profits.  You may also be required to submit a Self Assessment tax return and report your income and expenses to HMRC.

We have assisted many clients in identifying their allowable expenses and helping them reduce their tax bills.

If you have been receiving rental income and have not reported it to HMRC, then you may be able to make a disclosure under the Let Property Campaign.

We can help you make this disclose and make sure you only pay the right amount of tax whilst minimising interest and penalties payable.

SDLT applies on the purchase of interests in land in England and Northern Ireland (Scotland and Wales have their own Land and Buildings Transaction Tax and Land Transaction Tax respectively– not covered here).

With recent changes to SDLT and the introduction of the 3% surcharge, many taxpayers are finding it increasingly difficult to determine if and how much SDLT they may have to pay.

Expert tax advice can make sure you don’t face an unexpected and unwelcome tax bill or overpay tax unnecessarily.

As your property portfolio grows, you may wish to consider the benefits and drawbacks of incorporating your rental business into a company.

Taking into account the rental income received, your personal circumstances, and your future intentions for the business, we can help guide you through this process and ensure that your business is structured in the most tax efficient manner in a way that suits you.

If you are thinking of selling your rental property, you may benefit from tax advice prior to the sale to ensure that the sale goes ahead in the most tax efficient way and that all available allowances and deductions are claimed.

When considering your liability to capital gains tax, we will always consider the availability of tax reliefs such as Principal Private Residence Relief (PPR) and Lettings Relief to make the most out of your sale.

If you are selling commercial property, then VAT and capital allowance considerations should also be taken into account.

Stamp Duty Land Tax: Further Reading

Stamp duty land tax (SDLT) was introduced in 2003* and since then has been subject to extensive reform.

SDLT is charged on the purchase of interests in land and is payable by the purchaser. It is calculated based on the consideration paid, and includes not only money but also money’s worth (e.g. the assumption of a mortgage).

SDLT is currently charged on a ‘slice’ basis (like income tax). This means that SDLT is charged at increasing rates for the amount of consideration that falls into the different SDLT bands.

Different rates apply depending upon whether or not the property is residential or mixed/commercial and whether the individual buying the property is an individual or non-natural person (e.g. a company).

Higher SDLT Rates

Since 1 April 2016, all purchases of residential properties have been subject to an extra 3% on SDLT in each band where the purchaser is either:

  • a non-natural person (e.g. a company), or
  • an individual who already has a dwelling and isn’t replacing their main residence.

These new rates are subject to a number of special rules and transitional provisions. Extra care must be taken when considering whether the higher rates will apply as these rules can catch taxpayers by surprise leaving them with unexpected tax bills or having paid the higher rates when they aren’t applicable.

Since 2012, a special rate of 15% on the total consideration paid has applied to the purchase of residential properties by non-natural persons. This special rate is separate to the recent 3% increase to each SDLT band.

The threshold for this special 15% rate was originally set at £2 million but from 2014 has been reduced to £500,000.

* From 1 April 2015 land in Scotland is subject to the Land and Buildings Transaction Tax. From 1 April 2018 land in Wales is subject to the Land transaction Tax. Neither of these taxes are covered here.

The Problem

A husband and wife owned a portfolio of 28 rental properties comprising both residential and commercial properties.

They were keen to transfer the properties into a newly incorporated company but were unsure of the capital gains tax (CGT) and stamp duty land tax (SDLT) implications of the arrangement or the availability of reliefs.

The Solution

We set out the tax implications of the proposed transfer and calculated the estimated tax due.

We considered the availability SDLT reliefs, with a particular focus on the “partnership exemption”. As part of this advice, it was necessary to examine whether there was a partnership in place and whether the activities undertaken amounted to a “business”.

In terms of the couple’s CGT liability, we determined the most tax efficient way to allocate losses and the availability of incorporation relief.

The taxpayers’ compliance obligations were also considered, such as the time frames for making the relief claims and reporting the transfer on their tax returns.

The Result

The level of activities carried on by the taxpayers in respect of their properties was significant, therefore there was a strong claim that incorporation relief would be available. As a result, the gain was deferred and there was no immediate charge to CGT on the transfer.

In terms of the SDLT partnership exemption, whilst the level of activities carried on were likely sufficient to amount to a business, as partnership returns had not been submitted and there was no partnership agreement there was a risk that HMRC would challenge the position that the couple ran their property business as a partnership. With this in mind, we provided advice on how they may be able to strengthen their claim.

We also considered an alternative scenario where the taxpayers did not make a claim for the exemption. Whilst the 3% surcharge would apply on the acquisition of the properties by the company, multiple dwellings relief should be available in respect of the residential properties to reduce the overall SDLT liability.

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Pensions

Whether you want to make contributions to your pension fund, or are already in receipt of a pension and unsure of the tax consequences, PD Tax can ensure help you understand the UK tax implications of pensions.

Pensions can be an efficient method of saving for many taxpayers as they benefit from a range of tax reliefs designed to encourage people to save for their retirement.  However these reliefs can come with certain restrictions based on things like your income, available annual allowance, and the amounts already saved in a pension.

We can assess your circumstances and help you understand the tax implications of your pension, including determining what are the maximum contributions you can make whilst retaining your eligibility for relief as well as identifying any useful tax claims that can be made.

Alternatively, you may be keen to withdraw funds on retirement and are unsure of what tax you may have to pay. Taking into account your future goals, we can help identify the most tax efficient route to access your funds while ensuring that your objectives can be met.

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Overseas Income/Gains

If you are resident in the UK and receive income or gains from overseas sources, it is important to consider whether it will be liable to UK tax, and if so, your compliance obligations.

In identifying your liability to UK tax, we will consider the impact of any Double Tax Treaties (if applicable) and the availability of any reliefs – particularly if the income or gains have already been subject to foreign tax.

If you are required to report and pay UK tax on your overseas income/gains, we can also assist in calculating the tax due and making all necessary submissions to HMRC.

Please note that we can only advise in respect of your UK tax liability, however we have connections with a number of non-UK tax advisors who can help you in relation to your tax liability in the overseas jurisdiction.

The Problem

Our client had undisclosed income and gains from a Swiss bank account and wanted to bring his tax affairs up to date whilst ensuring that the tax was calculated correctly and penalties minimised.

Our client was also concerned about the impact of the UK-Swiss tax treaty, under which he would have suffered a one levy of over £300,000 unless action was taken prior to 31 May 2013.

The Solution 

We provided advice and illustrative computations comparing the Swiss Tax Treaty with the Liechtenstein Disclosure Facility (LDF) and a voluntary disclosure to HMRC.

Following our clients decision to proceed with the LDF, we prepared detailed calculations of the UK tax liabilities, liaised with advisers in both Switzerland and Liechtenstein, provided a detailed analysis of the more complex areas of the disclosure and finally corresponded the disclosure to HMRC on our clients’ behalf.

The Result 

HMRC accepted our disclosure and the calculations of tax, interest and penalties without amendment.

We saved our client over £166,000 compared to the charge he would have suffered under the UK-Swiss Tax Treaty.

Specific benefits of making the disclosure through the LDF included:

  • Reduced rate of penalties as compared to a voluntary disclosure or unprompted HMRC enquiry/investigation
  • Guarantee of no criminal prosecution
  • Past tax liabilities brought up to date giving relief to our client and preventing an enquiry by HMRC

Testimonial provided by Mr T in September 2013

The review that you initially provided of my situation allowed me to understand that it was probably going to be better to make a disclosure under the Liechtenstein Disclosure Facility (LDF) rather than suffer the UK-Swiss Tax Treaty one off levy. This certainly proved to be the case.

Your thorough and robust approach to the calculations and their presentation allowed me to make my disclosure in a confident manner and I was very pleased that HMRC did not enquire into the disclosure.

In general, I was delighted with the service and results delivered by Vikki and yourself.

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Inheritance Tax Planning

Inheritance tax can be charged at a rate of up to 20% on certain gifts during your lifetime and, after you pass away, it can be charged at a rate of up to 40% on the value of your estate in excess of the nil-rate band.

So if you want to ensure your loved ones can benefit from your estate it’s important to plan for inheritance tax as soon possible, as procrastination on this matter is likely to cost you money.

Pro-active inheritance tax and succession planning can help protect your assets for the future and have a significant impact on the value of assets for your beneficiaries. We can provide you with a wide range of bespoke inheritance tax solutions, from inheritance tax and Will review services, to tailored tax planning for your estate (including trusts).

The type of inheritance tax planning devised will depend on the type of assets involved (i.e. property, cash, collectables, or business interests, e.g. shares) and, most importantly, your preferences for how and when your estate should be passed on.

The Problem

A landlord was keen to transfer his rental property portfolio to his children during his lifetime in order to mitigate inheritance tax, but was concerned that there may be significant capital gains tax implications on disposal.

The Solution 

After considering a number of different options, we concluded that a family trust route would be the most appropriate and tax efficient way to help our client achieve his goals.

This involved an outright gift of properties to the value of the annual exemption, meaning that no capital gains tax was chargeable on transfer.

We then arranged for our client and his wife to gift into trust the properties up to the value of their nil rate bands. The properties with the lowest gains in proportion to their value were transferred first so that they could benefit from an uplift in base cost, thereby reducing the capital gains tax liability on a future sale.

As our client intended to continue managing the properties, we suggested that he establish a property management company owned by him and his wife. They could then charge management fees to the trust and rental profits will be available through dividends.

The Result 

Provided that both clients survive seven years from the date of gift, the properties will be outside of their estates and they will have saved Inheritance Tax of approximately £260,000.

By extracting rental profits via a property management company, our client will continue to profit from the properties without invoking any anti-avoidance measures.

The Problem

The Will of a deceased’s estate with gross assets over £5 million contained complex provisions for determining the charitable legacy to be paid by the executors of the estate.

The executors and solicitors administering the estate needed assistance to determine the amount of the charitable gift.

The Solution 

After carefully examining the terms of the Will and the principles of the cases of Re Benham and Re Ratcliffe, we concluded that grossing up was not necessary to calculate the size of the residuary legacies and in particular the gift to charity.

As the charitable gift was more than 10% of the net estate, the reduced rate of IHT of 36% could be applied, saving the estate £170,000.

We also identified that a number of shares had been sold at undervalue and that loss relief could be claimed, saving a further £10,500.

The Result 

After finalising our calculation and the inheritance tax return, it became apparent that the estate had already overpaid inheritance tax and was, in fact, due a refund. HMRC duly issued a probate summery to the estate and the refund was issued shortly thereafter.

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Capital Gains Tax

Capital gains tax applies on the disposal of assets, such as property, land, and shares.

When considering your liability to capital gains tax, we will always make sure you can get the most out of the available allowances, reliefs, and deductions.

Where possible, it is good practice to obtain advice prior to selling or disposing of your assets as with careful planning it may be possible to reduce, defer, or avoid capital gains tax due by taking action in advance. This is particularly important if you intend to leave the UK or arrive from overseas.

We can also prepare the necessary paperwork to report gains and losses to HMRC, so you can rest assured that you have met all your compliance obligations.

Entrepreneurs’ Relief

Entrepreneurs’ Relief (often abbreviated to “ER”) is a valuable capital gains tax relief which may be available when you sell all or part of your business.

Provided that the relevant conditions are met, the effect of the relief is to reduce the rate of capital gains tax to 10% on the entirety of the gain.

As this is such a precious relief for entrepreneurs, PD Tax recommend that regular reviews are undertaken to ensure that you and your business meet the necessary requirements. We can advise you on whether you qualify for the relief, and if not, recommend steps you can take to ensure that you are eligible on a future sale.

The Problem

The client inherited a property from her parents many years ago. She was keen to gift the property to her three children but was worried about having to pay capital gains tax on the gift.

As she had never lived in the property she was not eligible for private residence relief (PRR).

The Solution

We provided the client with an illustrative calculation of the capital gains tax she would suffer on the gift to her children assuming that no other steps were taken prior to the gift.

Once the level of the tax at stake was quantified we could provide the client with a number of solutions to mitigate the upfront capital gains tax cost including:

  • Payment of the capital gains tax by instalments over 10 years,
  • Living in the property as her main residence for a period of time prior to the gift so that part of the gain could be exempted through private residence relief,
  • Transferring the property into a discretionary trust for the benefit of her three children. The property could either be retained in the trust or the trustees could choose to distribute the property to the children.

The Result

The availability of holdover relief for transfers into and out of a discretionary trust meant that it was possible to transfer the property to the three children without incurring an immediate liability to capital gains tax.

A tax saving of over £25,000 as compared to an outright gift.

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VAT

VAT is a key consideration for businesses, as the payment and refund of VAT can have a significant impact on cash flow and funds available.

Some key VAT issues that we can advise on include:

  • Whether goods and/or services are a “taxable supply”
  • Land and property & Option to tax
  • Group companies
  • Transfer of business
  • Registration and deregistration
  • Flat-Rate Scheme
  • Capital goods scheme
  • International VAT issues

We can assist with VAT-specific queries but will also consider the VAT implications of any transaction as part of our holistic tax advisory service.

The Problem

A pub was purchased, which also contained a modest residential flat. VAT on the acquisition was apportioned as follows: 90% standard rate VAT (applying to the commercial aspect of the property used as a pub), and 10% VAT exempt (relating to the residential part of the property).

Following a substantial refurbishment of the property, the owner wanted to confirm:

  1. the VAT that was reclaimable on the refurbishment costs, and;
  2. given that the refurbishment mainly related to the commercial aspect of the property, whether this would affect the commercial/residential VAT apportionment going forward.

The Solution

The refurbishment costs were analysed to determine which costs related to: the commercial part of the property; the residential part of the property; and to both parts of the property together. Following this, we consulted the partial exemption rules for VAT, and the ‘de minimis’ rule, to determine how these applied.

We investigated the apportionment of VAT, considering the industry standard for pubs (90:10), relevant case law concerning the VAT apportionment on pubs, and the general rules on apportioning VAT, to obtain a full understanding of the matter.

The Result 

The level of refurbishment costs that related to the commercial and residential parts of the property respectively, was found to satisfy the partial exemption rules and ‘de minimis’ test. As a result, 100% of the input VAT on the refurbishment was found to be reclaimable.

It was also found that the industry standard of 90:10 should continue to apply and remain unchallenged despite the significant refurbishment costs to the commercial part of the property. It should be noted that where an alternative VAT split may be more appropriate, circumstances should be considered in the round, with weight given to all relevant factors e.g. floor space, usage, potential usage etc.

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Valuations

There are many situations when a company valuation may be required, such as:

  • A sale of a shareholding
  • Setting up an employee share scheme
  • Earn-outs
  • Shareholder disputes
  • Meeting the terms of a shareholders’ agreement
  • Matrimonial disputes
  • Shareholder protection insurance
  • For inheritance tax purposes
  • Gifts into a trust 
  • A gift of shares requiring holdover relief

PD Tax are experienced in providing valuations of businesses. Taking into account the purpose of the valuation and your company’s specific circumstances, we will consider the most appropriate method of valuation and prepare a full and independent report. Where required, we can also assist in the negotiation process or help you develop your exit strategy .

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Succession Planning

If you are considering retiring from your business, then careful structuring of your succession (whether to family members, key staff, or outside investors) is vital to mitigating the tax paid on your exit.

If you are planning on selling your company  then tax advice can help ensure you make the most of all available tax reliefs for the sales of businesses.

If there is no willing purchaser then the company may opt to purchase the shares directly from the shareholder.

We have considerable experience in assisting clients plan for their retirement by devising the most suitable strategy to meet their needs.

Following your exit from the business, we can help determine whether you will need to report the gain on your Self Assessment tax return, and if so, assist with the preparation and filing of all the necessary paperwork.

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Share Schemes

If you are keen to incentivise, retain, and reward key staff, we can design and implement an attractive and effective share option scheme for the benefit of your employees.

The four tax-advantaged share option schemes approved by HMRC are:

  • Enterprise Management Incentives (EMIs)
  • Company Share Option Plans (CSOPs)
  • Share Incentive Plans (SIPs)
  • Savings Related Share Option Schemes (also known as Save As You Earn, or SAYE, schemes).

Prior to implementing any scheme, we will consider the conditions in light of your company’s circumstances to ensure that it is most suited to your business.

There could also be tax advantages to the shareholders as a subsequent outcome of the scheme.

The Problem

The client had two employees who were key to the future growth of the company. The existing shareholder directors were concerned that the employees may look for opportunities elsewhere and were keen to encourage them to stay with the company by putting an incentive package in place.

The Solution 

We quickly established that an EMI Share Option Scheme would incentivise the employees by providing a mechanism through which they can become shareholders in the company.

By utilising an Employee Benefit Trust, the existing shareholders could also extract funds from the company in a tax efficient manner rather than their shareholdings simply being diluted by the issue of new shares to the employees.

Both the company and the employees were happy with our proposed solution so we implemented the EMI share option scheme, taking care of all the EMI share option scheme and Employee Benefit Trust documentation and agreeing the value of the shares with HMRC.

The Result 

The two employees have been given targets, which if met, will allow them to exercise the EMI share options over 15% of the shares each, in three tranches over the next 10 years.

When the shares are exercised; the employees will have no tax to pay on the benefit received, the shareholders will receive a payment for the shares (potentially paying tax of 10% due to the likely availability of entrepreneurs relief), and the company will receive a corporation tax deduction for the funds contributed to the Employee Benefit Trust to facilitate the purchase of shares.

Our client found that the performance of the two employees increased noticeably as soon as discussions over the terms were entered into – now that the EMI scheme has been implemented the results should be even better.

The Problem

PD Tax were appointed to assist a group of shareholders in selling their business to a third party. It was important to them that they sold their shares in the company to optimise their tax positions.

However, after carrying out due diligence, the buyers decided that they did not want to buy the trading company from the sellers because they thought that the company had undertaken an aggressive employee benefit trust (EBT) tax arrangement in the recent past (PD Tax did not advise on the EBT arrangement).

The buyers suggested that they buy the trade and assets from the trading company, as they were still keen to make the acquisition. However, this was not in the interests of the sellers because this meant that they would suffer a much higher rate of tax than if they sold the shares.

Therefore the EBT became a sticking point in the deal.

The Solution 

PD Tax worked with the sellers to develop a structure which meant that they could retain a low tax rate, whilst retaining the company which had carried out the planning, thus allowing the purchaser to acquire a new “clean” company.

We were able to develop a practical solution to the problem and the buyers were happy to utilise our proposal to overcome the EBT arrangement, as far as the sale was concerned.

The Result 

With the support of PD Tax, the sellers were able to complete the sale without further discussion regarding the level of consideration for the business.

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