Making Tax Digital, PAYE codes and P800s, IHT and holiday cottages

Just as we published last week’s tax tips the Government made the stunning announcement that MTD is to be delayed; we have more details below. HMRC’s PAYE computer appears to be programmed with the wrong tax law, so there will be errors in PAYE codes and P800s computations to look out for. Finally, a recent case busts the myth that you can get IHT relief on the value of furnished holiday accommodation.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

IHT and holiday cottages

Years ago, tax advisers would say that an active holiday lettings business should qualify for IHT business property relief (BPR), if the owner died whilst running the business. This would allow the value of the holiday accommodation to be covered by the 100% BPR exemption.

However, HMRC changed their view on the availability of BPR in late 2008, and have been challenging estates where BPR is claimed for holiday lettings ever since. The first notable case since this change of approach was Pawson, which the taxpayer won at the First-tier Tribunal, but was defeated at the Upper Tribunal. Leave to appeal to a higher court was refused.

The Pawson case concerned just one let property, and although it was actively managed, the Upper Tribunal decided that the property was held mainly as an investment, so it didn’t qualify for BPR.

The latest case of Marjorie Rose, concerned 11 properties owned by a partnership, of which the deceased held a two-thirds share, valued at over £1m. Significant services were provided to the guests in the holiday cottages, by the nearby hotel (owned by the same family) such as internet, parking, administration, personal guest services, food services, ordering milk and newspapers. However, the tribunal decided that all 11 properties were held mainly to obtain rental income, and hence they were investments that do not qualify for BPR.

Where your clients run holiday lettings businesses it would be prudent to review their IHT planning in light of this case.

IHT planning, VAT payments and surcharges, Dangers for online filing

We have something to thank the politicians for; their talk about dementia tax has encouraged people to think about the value of their homes and how much they may need to pay for long-term care. This provides a good opportunity to discuss IHT planning, as we explain below. We also have tips on avoiding VAT surcharges, and a warning about cyber-attacks on your firm’s systems.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

IHT planning

People don’t want to think about their death, or the IHT potentially payable, but they will consider the cost of the care they may need, as that is an issue that many have addressed for an older relative. The talk of “dementia tax” to pay for social care may also prompt people to think about their net wealth.

The retired population is comprised of two distinct groups; those who are active and healthy, who may be caring for an older relative, and those who have difficulties undertaking daily tasks and who need some form of care or assistance. The ageUK briefing (see below) provides an excellent summary of the issues to consider.

The dilemma for the fit and active group is that they know they may need care in the future, but they don’t know when, and for how long. They may wish to undertake IHT planning, but they also need to retain access to sufficient investments which could be used to pay for care.

The solution for this group can be to make investments which qualify for an IHT exemption using business or agricultural relief (HMRC have dropped “property” when referring to BPR and APR). Shares quoted on the AIM and shares issued under the EIS or SEIS will qualify for IHT business relief. There are a number of companies which market investments in these areas as IHT shelters.

Take the opportunity to talk to your clients about “dementia tax” (not a real tax), and introduce facts about IHT (a real tax), including planning strategies to cope with both IHT and potential care needs. You need to be registered with the FCA to recommend the purchase of any particular investment product, so be careful how you frame advice in this area.

IHT nil rate band, Statutory maternity pay, Errors in PAYE accounts

Tax reliefs and benefits have to be targeted, in order that the tax advantage is restricted to the class of taxpayers whom Parliament intended should be the recipients. The complex rules sometimes create unexpected outcomes, as can be seen with the residential nil rate band for IHT, and the calculation of statutory maternity pay. In last week’s newsletter we also highlighted a problem with certain online PAYE accounts maintained by HMRC.

IHT nil rate band

The IHT nil rate band (NRB) has been frozen at £325,000 per person since 6 April 2009, and is set to stay at that level until 6 April 2021. However, to meet an election promise to increase the IHT exemption to £1m, a separate residential nil rate band (RNRB) is available to set against the value of the family home for deaths from 6 April 2017.

The RNRB starts at £100,000 per person in 2017, and increases by £25,000 each year to £175,000 in 2020 (coinciding with the next general election). When the RNRB is combined with the NRB of £325,000, the individual has £500,000 of IHT-exempt wealth, or £1m for a married couple.

HMRC has recently published guidance on the RNRB, which is worth reading, as taxpayers could miss out on this relief if they make gifts in the wrong order, or to the wrong people.

The RNRB only applies to a home (or its value) given to one or more direct descendants on death, either under a will, by intestacy, or via a deed of variation. The executors of the estate can sell the home and pass the value to the descendants, and the RNRB still will apply.

If the home is held in a trust, you need to check who the beneficiaries of the trust are, as the home must be treated as part of the deceased’s estate on death to qualify for RNRB. A home caught by the ‘gift with reservation of benefit’ rules (ie the donor lives there after giving it away) will qualify for RNRB, as the home is treated as part of the deceased’s estate although it may be legally owned by another person.

The RNRB does not apply if the home:

  • was given to the relative during the deceased’s life, so is a potential exempt transfer (PET);
  • is transferred into a trust on death to be held until the beneficiaries reach a certain age;
  • is given to someone who is not a direct descendant, such as a niece or god-child;
  • has never been a home of the deceased (eg is an investment property).

There are further complicated rules that apply where the home was sold on or after 8 July 2015 in order to downsize, or for the owner to move into rented property such as a care-home. Please ask one of our IHT experts for advice on this tricky area.