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.

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

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 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.

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.

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.