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.

SDLT supplement, Employment Allowance, IHT planning

Tax rules which have simple cut-off thresholds can become complex when tested at the limits, as two examples relating to SDLT and the Employment Allowance illustrate. We also had a reason to thank Prime Minister David Cameron last week, for drawing attention to some key aspects of inheritance tax planning.

This is an
extract from our topical tax tips newsletter dated 14
April 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

IHT planning 
I was a bad week for David Cameron. On his first day back in the House of Commons he was forced to explain his family’s tax affairs, including some inheritance tax planning under which he received two large gifts from his mother totalling £200,000. 
There was extensive coverage of this issue, with many newspapers citing the £80,000 IHT apparently “saved”. Of-course the IHT is only avoided if the donor survives for seven years after the date of the gift, but the fuss may well have prompted your clients to think about making gifts to the younger generation.    
This gives you a good opportunity to bring up the topic of IHT planning with your clients, as if it’s OK for the PM to do (and he solidly defended the move), it should be good enough for them. 
Many older people are afraid of giving away money which may be needed to fund care in their last years. This is understandable, but you can help put their minds at rest by working through some cash-flow forecasts using various estimates of future cash needs and life expectancies. 
There are some key changes to IHT exemptions for the family home which will apply to deaths on or after 6 April 2017 onwards (Finance Bill 2016, s 82, Sch 15). The property needs to pass on death to a direct descendent of the owner for the exemption to apply. So the Will must be clear about who is to receive specific properties in the estate. Step children and adopted children are treated as direct descendants for this purpose, but nieces and nephews are not. 
Opening a conversation about planning for tax due after a death is never easy, but David Cameron has provided an ideal excuse – use it.

This is an
extract from our topical tax tips newsletter dated 14 April
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>> 

State pension entitlement, Student loan repayments, IHT changes

Last week we had advice for older clients concerning their entitlement to the state pension and for employers of young people who are repaying student loans. We also reviewed the changes just over the horizon for IHT.

IHT changes 
The Budget on 8 July 2015 introduced the concept of an IHT nil rate band attached to the family home (“RNRB”). The latest HMRC Trust & Estates newsletter includes new guidance on the RNRB, and the current Finance Bill has been amended to clarify some points. 
The RNRB will start at £100,000 per person for deaths from 6 April 2017 and will eventually be worth £175,000 per person from 2020. However, it will only be of use to taxpayers with children as the exemption will be restricted to homes which are left on death to direct descendants: eg to a child or the child’s widow/widower where the child died before the parent  – as long as the widowed spouse has not remarried by the date they inherit the property. 
Some families have already placed properties in a trust for the benefit of the children, or the Will provides that the property is to be held in a trust on the death of the parent. In such circumstances the RNRB will apply to the value of the property if the trust is:
  • a trust for bereaved minors;
  • 18-25 trust; or
  • qualifying interest in possession trust.

Where the Will leaves the property to a discretionary trust for the benefit of the direct descendants the RNRB will not apply. This is a common structure used in Wills drawn up before 2007, so a review of the Will is now essential. 
Another feature of the RNRB is to preserve its use where the family home has been sold since 8 July 2015, and the proceeds have not been fully invested in a new property. In other words the parent has down-sized or moved to rented accommodation such as a care home. The Government has issued a technical paper which attempts to explain how this down-sizing relief will work. It’s worth reading if you have clients in that situation.
This is an
extract from our topical tax tips newsletter dated 24 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. We’ve been publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to know about each week.

Planning for death, Travel and subsistence, P800 may be wrong

Last week we are urging you to help clients plan for an untimely death, for reasons we explain below. We also outlined the proposed changes to tax relief for travel and subsistence expenses incurred by employees of personal service companies and other intermediaries. Finally we issued the annual warning about incorrect P800s which are on their way to your clients.

Planning for death 
For third time in a month we have received an email which begins: “It is with deep sorrow I have to inform you of the sudden death of our colleague…”. This is a reminder that death is not a distant appointment; it should be planned for as it may arrive tomorrow. 
A useful way to introduce the topic of death into a conversation with a client is to check whether they are married or in a civil partnership with their long-term partner, then run through the benefits and tax reliefs which the survivor of an unmarried couple may be denied on death.
  • Surviving unmarried cohabitees have no rights to state bereavement benefits based on their late partner’s national insurance contributions.
  • The unmarried partner may not be able to receive a pension from their deceased partner’s employer, although that will depend on the terms of the pension scheme.
  • Assets passed to the bereaved unmarried partner may be subject to inheritance tax, where the value of the estate exceeds the nil rate band of £325,000.
  • There is no transfer of the unused IHT nil rate band to the survivor of an unmarried couple.
When valuable assets are exchanged between the couple before death the transfer is taxed as if it was a sale at market value, if the two parties are not married. 
The pension issue may be solved in advance by making a nomination in favour of a named individual and ensuring the pension trustees have a copy of that nomination. The other issues can only be avoided by marrying or not dying. 
The conversation can move on to what would happen to the business if the main earner died suddenly. Practical issues such as; who would take control of the bank accounts, access the passwords to computer systems, and step in to meet the business customers’ needs, all need to be addressed. 
This last point is relevant to your own practice if you operate as a sole practitioner. Your clients’ tax return filing deadlines will still have to be met after your death or incapacity. Have you nominated alternate for your business, and does your spouse or partner know who that is?

This is an
extract from our tax tips newsletter dated 17 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.

Wealth planning, IHT planning, CGT planning

In last week’s newsletter we looked at family wealth and how it can be distributed amongst the members of the family to reduce tax charges. 

Following the Summer Budget, any IHT planning should be revisited, particularly in relation to the family home. If there are investments which are expected to be exempt from CGT on sale, you should check that the right claims have been made at the relevant times to preserve that exemption.     

IHT planning

The promise in the Summer Budget of a £1 million IHT exemption is not going to be a reality until 2020 at the earliest. An additional home-related nil rate band of £100,000 per person will be introduced from 6 April 2017. That will be increasedby £25,000 each year until it reaches £175,000 per person in April 2020.
As both the normal nil rate band (NRB) of £325,000 (frozen until 2021), and the home-related NRB of £175,000 are transferrable to the surviving spouse or civil partner, it will be possible to transfer a total NRB of £500,000 on the first death.This leaves the survivor with a double helping of £500,000 NRB – reaching the magic figure of £1m. The transfer of the home-NRB to the survivor applies evenwhen the first death occurs before 6 April 2017 (new IHT 1984, s 8G) when the home-NRB comes into effect.
However, the home-NRB can only be set against the value of the deceased’s home which is left their direct descendants i.e: children including step-children and adopted children, grandchildren or great-grandchildren. Where the donor wants to make provision for other relatives such as nephews, nieces, or perhaps siblings, their Will needs to be clear what assets or sums of money must pass to which individuals, in order to make maximum use of the home-NRB. This may require the couple’s Wills to be redrafted.
The home must also have been a residence of the donor, not an investment property. If the deceased had more than one home the executors will be able to choose which home is to be set against the home-NRB.
Where the home has been sold before death, but on or after 8 July 2015, the value realised from that sale will be available to set against the home-NRB.However, we can’t be sure how this ring-fence of proceeds will work in practice, as the legislation to implement this feature of the home-NRB will be included in Finance Bill 2016.    
We do know that the home-NRB won’t be available to estates valued at over £2.35m, and it will be tapered down by £1 for every £2 of the estate value over £2m.
If your clients believe they can leave IHT planning to the next generation, as it can all be sorted out with a deed of variation to their Will, you should point out that the use of deeds of variation for tax purposes are under review. 

This is an
extract from our tax tips newsletter dated 23 July 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>