Principle Private Residence Relief

PPR relief is available to individuals on the sale of their own home, referred to in legislation as a ‘dwelling house’, as long as the property has been the individual’s only or main residence, at some time during ownership.

PPR relief will be given in full, provided the following conditions are met;

• The dwelling house has been the individual’s only or main residence throughout the period of ownership
• The individual has not been absent from the property during the period of ownership, other than for an allowed period of absence
• The gardens or grounds, including the dwelling house, are not greater than the permitted area
• No part of the property has been used exclusively for business purposes during ownership

If all of the above conditions are met, capital gains tax will not be due on the sale of the property. However, it is important to note, even if all of the conditions are met, PPR relief will not be due if the acquisition of the dwelling house was made wholly or partly for the purpose of realising a gain from its disposal. In order for a property to be considered to be a person’s residence, the individual must provide some evidence that their residence in the property showed some degree of permanence or continuity.

If some of the conditions are not met, partial relief may still be due, but the disposal of the property will need to be disclosed on the Capital Gains Tax pages of the individual’s personal tax return.

Lettings Relief

Provided PPR relief applies, the last three years of ownership of the property is treated as if the dwelling was the individual’s only or main residence, regardless of whether it was. Therefore, should the individual move out of the property, PPR relief will still cover any gains made, as long as the property is sold within three years.

In addition to this, if during the period of ownership, the dwelling house has been let as residential accommodation, Lettings Relief will also be due. The amount of relief due is calculated as the lower of 1) the amount of PPR relief already calculated, and 2) £40,000 per individual. Therefore for a couple, this could mean additional relief of up to £80,000 on disposal.

Second Residence

Where an individual owns more than one home, they may, within two years of acquiring a new residence, make an election as to which property is to be their main residence, and hence covered by PPR. Once made, the election may be varied between properties at any time, and this can be a usfeul tax planning tool to establish PPR relief on more than one property. However, both properties must satisfy the conditions for PPR relief, and if no election is made, the main residence will be decided on the facts.

Summary

Principle Private Residence relief is a very effective relief to mitigate Capital Gains Tax liabilities on property disposals, particularly combined with Lettings Relief, the 36 month rule and second residence elections. However, it advisable to take proper tax advice on this particular relief, especially where circumstances are not straight forward and full relief may not be due.

 The London Anniversary Games are to be held this summer to help prolong the legacy of the London 2012 Olympic and Paralympic Games.

Usain Bolt has confirmed his attendance for the anniversary games. However, Usain Bolt’s attendance may be as a consequence of a recent tax announcement by H M Revenue & Customs – as well as a celebration of the London 2012 Olympic Games where he won 3 gold medals.

UK Tax Rules for Overseas Athletes competing in the UK

 When an overseas based (ie non resident) entertainer or sportsperson performs in the UK, this will crystallise a potential liability to UK income tax. These rules apply to fees, prize money and, more controversially, a proportionate share of their worldwide sponsorship income.

The rules relevant to this are contained within Section 27 of the Income Tax (Earnings and Pensions) Act 2003 and Sections 13 and 14 of the Income Tax (Trading and Other Income) Act 2005.

Previous UK Tax Case – Andre Agassi

Andre Agassi, the former world number 1 tennis player, who won 8 grand slam titles (including Wimbledon in 1992) was the subject of a UK tax case in relation to these rules which was concluded in the House of Lords in 2006. In this case, H M Revenue & Customs successfully concluded that a proportion of the worldwide sponsorship money paid from Nike and Head to Agassi Enterprises Inc. was subject to UK income tax. This was as a result of the tennis player’s performances at Wimbledon where he was wearing/using the endorsed products. This was despite the fact that neither Agassi, nor any of the sponsorship entities, were resident in the UK.

As a result of this case, and the tax rules that have been in enacted into the legislation to reinforce this, it has been widely known that Usain Bolt has turned down numerous invitations to compete in the UK.

H M Revenue & Customs recently announced in the budget that the athletes competing in the London Anniversary Games this summer will be exempt from these rules (and any tax) in order to ensure that high profile athletes are not deterred from attending.

Similar “tax” exemptions have also been provided by H M Revenue & Customs in relation to sportspersons at other UK events to:

•  London 2012 Olympic and Paralympic Games

• The forthcoming Champions League final at Wembley on 25 May 2013 between Bayern Munich and Borussia Dortmund

It is believed that a similar exemption has not been granted for international rugby players due to compete at the Rugby World Cup which is being held in England in 2015.

Conclusion

 The UK taxation rules can be a minefield for residents and non residents alike which is outlined by the above cases. It is possible to agree in advance with H M Revenue & Customs how certain types of income are to be treated for the purposes of UK taxation.

It is therefore imperative to plan your tax affairs with our specialist team at Perrys to clarify your obligations and obtain advance  agreements or clearance, wherever possible.

Lee Dyson, assistant manager at our Wrotham branch, is not only a referee, he’s also a pretty good one. And no longer is it just Lee telling us this, he has now been recognised by the FA too. When they released their list of referee promotions earlier this month, Lee had been promoted to Level 3, now refereeing in the semi professional, contributory leagues. Only a couple more levels to go and we could be soon seeing him sending off Rooney at Wembley for foul and abusive language.

And I must admit that Lee’s presence has seen a marked improvement in behaviour at our Wrotham office, too. Time wasting is no longer tolerated, blatant obstruction in the corridors is on the decline, and tackles from behind in the lunch queue have been cut out completely.

So congratulations to Lee on his achievement. The game needs good young referees to continue to flourish and we are proud to have one here at Perrys.

For further details, please see www.kentfa.com/news/2013/may/kent-referee-promotions-announced

The GAAR has been widely publicised as forming part of the Government’s strategy to tackle abusive avoidance of taxation. Within the published guidance, the GAAR will apply to ‘tax arrangements which are abusive’, and this is defined as ‘any arrangement which, viewed objectively, has the obtaining of a tax advantage as its main purpose or one of its main purposes’.

The GAAR will apply to the following taxes:

-          Income tax

-          Capital gains tax

-          Inheritance tax

-          Corporation tax (including amounts chargeable  or treated as corporation tax, such as the bank levy, tonnage tax, CFC charge & oil supplementary charge)

-          Stamp duty land tax

-          Annual tax on enveloped dwellings

-          Petroleum revenue tax

The guidance also states that the GAAR is to be extended to cover National Insurance Contributions, subject to future legislation being passed.

HMRC have also stressed that where something isn’t covered specifically by GAAR, will not mean that it won’t be dealt with using existing anti-avoidance legislation.

On a positive note, HMRC have also stated that the legislation includes safeguards to ensure that ‘any reasonable course of action is kept outside the target area of the GAAR’.  Examples of this include the choice of trading via a limited company vehicle rather than a sole trader, or the use of ISAs are outside the intended scope of the GAAR.

In addition, where business reliefs are used to encourage and support business growth, they will not be caught by GAAR. Such relief could include the use of EIS & VCT investment, Capital Allowances, Research & Development.

The GAAR should come into force in July 2013, and the guidance has generally been welcomed by advisors as it should provide an element of clarity to taxpayers. We look forward to seeing its introduction and monitoring its integration into the self-assessment system.

To view the guidance published by HM Revenue & Customs, please see the following link:

http://www.hmrc.gov.uk/avoidance/gaar.htm

The radio station was Meridian FM, a community based broadcaster run by volunteers in East Grinstead, mainly serving the local community. However, thanks to the internet its listeners include ex-pats and armed forces personnel, around the world.

The DJ, who managed to calm my nerves before chatting about, numbers, tax and the training we provide those wishing to embark on a career in the accountancy world, was the lovely Krys O’Brien,  a name that I can no longer say but have to sing in the style of a radio jingle.

The studio was a mass of high tech equipment and, although I saw a turntable or two, the music was cued up using a mouse rather than a needle!  Still, Krys had to be pretty ambidextrous to manipulate the buttons, faders, microphones and even answer the studio’s telephone whilst ensuring that she didn’t “crash the vocals”, DJ speak, I found out, for talking as an artist starts to sing.

I was only there for an hour but my time at the radio station got me thinking about how many local organisations rely, not only on the financial support of individuals and the business community but from the hours and hours put in by volunteers.  According to the organisation Volunteering England, 20 million people volunteer each year in the UK, spending 100 million hours, worth an estimated £40 billion to the Economy.

Regardless of whether it is community radio, a local charity, school or sports club, without this support many of these organisations just simply wouldn’t exist, depriving the rest of us of the support and services they provide.

But it is not just the recipients of this time that benefit.  The Volunteer Centre in Tunbridge Wells state that the benefits of volunteering include:

•  having fun
•  making new friends
• developing existing skills or learning new ones
• gaining work experience
• updating your CV
• getting up to date references
• being able to use volunteering as a stepping stone into paid employment.

So if you think that you can benefit from one or all of these, volunteering may be for you.

There are plenty of websites offering help and advice and from the 1^st to the 7^th of June Volunteers’ Week, will be celebrating the contribution made by volunteers. www.volunteering.org.uk/policy-and-campaign/volunteers-week

My thanks again to Krys and all at Meridian FM for a very enjoyable hour.  Would I do it again?

“Not ‘arf!”

107 Meridian FM

www.meridianfm.com

https://twitter.com/meridianfm

https://www.facebook.com/meridianfm

In order to work out if you are due to pay tax, you need to add up all your income in the usual way to see if this exceeds your tax free allowances.  Currently in the 2012/13 tax year the allowances are as follows:

Personal Allowance rates 2012-13       
Personal Allowance rates 2012-13 Income limit   

Basic amount for someone under 65 £8,105  £100,000
Age 65 to 74    £10,500 £25,400
Age 75 or over  £10,660 £25,400

The age-related allowances are reduced by half the amount (£1 for every £2) your taxable income is over your income limit.

Basic Personal Allowance reduces where the income is above £100,000 by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age.

Looking forward to the 2013/14 tax year…  At the moment the levels are set as below:

Personal Allowance rates 2013-14       
Personal Allowance rates 2013-14 Income limit   

Born after 05/04/1948   £9,440  £100,000
Born between 06/04/1938 to 05/04/1948   £10,500 £26,100
Born before 06/04/1938  £10,660 £26,100

The main thing to notice is that age is no longer the criteria but it is now date of birth, the reason for this is because the government is looking to phase out these age related allowances in the future.

Need any help?

If you or anyone you know is coming up to retirement age and needs advice on their tax affairs point them in Perrys direction.  We don’t charge for initial consultation and our friendly helpful teams will be able to ensure your tax code is accurate to give you peace at mind.

We pride ourselves on giving great service and part of this would be to ensure you as a client will be paying the correct amount of tax each month as you wouldn’t want any surprises at the year end.

Please contact Sean Rustrick on 01634 245900 or e mail rustrick@perry-company.co.uk

Joint Tenants

As joint tenants, the property belongs to both owners jointly, effectively as if a single owner, each owner does not have a specific share in the property.  As joint tenants, you cannot give away a share of the property in a will. If you die, your interest in the property passes automatically to the other owner and, for tax purposes, all income, expenses and gains are split 50/50 on the owners tax return.

Tenants In Common

As tenants in common, the property belongs to you jointly, but you also own a specific share of its value.  You can give away, sell or mortgage your own share. Also for Inheritance Tax planning purposes, if you die, your share of the property passes to the beneficiary named in your will and not necessarily to the other owner. For tax return purposes, HMRC will treat income from property held in joint names as if it belonged in equal shares, regardless of the actual ownership. If you want to be taxed on your actual share of the property, you will need to complete and submit form 17 – Declaration of Beneficial Interest in Joint Property.  Form 17 needs to be submitted to HMRC within 60 days of the date the declaration was made, together with evidence of the beneficial interest you have declared.

Finance and Stamp Duty

The finance on property is often overlooked when it comes to tax planning, but arrangement fees, redemption penalties and rates of interest are a major factor when looking to change the ownership of a property. For spouses, if finance can be obtained in either name, the simplest solution would be to gift a share in a property from a higher rate tax payer to a basic rate taxpayer, to reduce the income tax liabilities on rental profits. Due to the spousal exemption, the gift would not create a Capital Gains Tax event. However, if finance is involved and a spouse takes over responsibility for the mortgage, the amount of loan the spouse takes on is deemed to be the consideration for stamp duty purposes. Where finance is an issue, many property investors use a Declaration of Trust to change the beneficial interest in the property without changing the legal title.

Declaration of Trust

Declaration of Trusts are drawn up by a solicitor who should advise on whether they will hold up if challenged by HMRC. These are normally drafted to give a spouse, taxed at a lower rate, the right to the asset entirely. However, if the Declaration of Trust is drawn up to give the right to income only, but not the beneficial right to the asset, then this is likely to be challenged by HMRC. As for tenants in common above, a form 17 declaration should be made in respect of the beneficial interest in the property, and this would be submitted to HMRC with a copy of the Declaration of Trust.

For a number of years, the decision to make has been a tricky one when you take account of all the factors, however with the forthcoming changes to the capital allowance rules it will become even trickier. From April 2013, the government are proposing that the level at which you can claim 100% first year allowances will fall from 110g/km to 95g/km. This may not sound like a huge change, but the estimated effect is to reduce the number of cars that can claim the allowance from 700 to 80. In addition, it is proposed to reduce the general pool limit (above which the company will not be able to claim a balancing allowance if the car is sold) from 160kg/km to 130g/km.

So what do you do if the company car that you want is a little more environmentally un-friendly? The alternative is to lease it, whereby the company is allowed a deduction of most of the leasing cost when incurred by the company and when the car is changed there are no lingering capital allowances to unwind after the company has disposed of the car.

Remember that whilst the company can claim a deduction for the on-going maintenance costs of the car, there is still the personal benefit in kind that has to be paid by the individual and the additional class 1A national insurance contributions suffered by the company.

The alternative is to enter into a personal leasing arrangement or to buy the car outright after extracting additional income or dividends from the company, however, the cost of running the car will fall on the individual (but you will be able to charge the company for those business miles you do).

So what do you do with the old company car that is ageing a little? In certain circumstances if you hold onto the car via the company you could be paying more in benefit in kind tax on the car on an annual basis than the car is now worth. It might be time to consider transferring the car into personal ownership, paying the on-going maintenance costs yourself and charge the company for your business miles.

How to pay for and run a company car is a difficult choice and can cost the company or you unforeseen amounts in extra tax. Please call us if you would like some guidance in helping you avoid being unlucky in tax with the 13 plate registrations in what is becoming an increasingly complex area.

It is always easier to agree the rules of running an operation when the business is worth little or nothing. Additionally, it is essential to agree the structure of the business in advance rather than to evolve as the turnover and value grows. There are numerous considerations and one blog will not cover them all but below are a few important areas to bear in mind.

The most important decision is what structure would be most beneficial:  self-employed, Limited Liability Partnership or Limited Company.

Serious thought should be given to the initial equity split.  Look carefully at the equity ownership and whether benefit could be gained by the issue of alphabet shares without breaching any dividend anti avoidance rules. Consider whether spouses should be a part of the business and if there be any tax efficient benefits available from such a set up. It should be remembered that once the opening position has been established, it becomes increasingly difficult to alter it.

Can a simple Holding Company be used to protect assets within the business and offer a form of shield for the participants?

If the original shareholders vary significantly in age, retirement issues should be addressed. One should also assess what would happen to their interests should one of the participants die. In most cases a family member of the deceased would not be a popular choice with the remaining owners who would usually they would wish for the shares to be made available to them. Care should be taken here though to avoid a binding pre-emption purchase clause as this may well negate Business Property Relief for Inheritance Tax. So look for a ‘put and call’ option instead to achieve this aim efficiently.

Consider simple cross life assurance to be able to buy back the ownership should a participant die. If no such provision is made then, as the business gains value, the purchase value of the shares may prove unaffordable for any survivors which in some cases could even threaten the business. In all cases ensure that the position is agreed by all and included in up to date wills to avoid possible future conflict. The level of insurance should be reviewed regularly to ensure that it is realistic and any insurance raised in line with the values.

There are many other areas to be considered but hopefully the above should give food for thought. Please contact me at any time if you would like to discuss this further.

“There are known knowns; there are things we know we know.  We also know there are known unknowns; that is to say, we know there are some things we do not know.  But there are also unknown unknowns – the ones we don’t know we don’t know.”

This was made in connection with Iraq and the issue of WMD but it occurred to me that this could also be applied to the process of due diligence.

Due diligence is undertaken in different situations, most commonly when there is a purchase of, or investment into, a business.  Due diligence will cover commercial aspects and legal issues as well as financial matters, and it is financial due diligence that is the subject of this article.

The basic purpose of financial due diligence is to enable a prospective purchaser or investor to make a judgement as to whether to proceed with the acquisition or investment.

To this end we plan and undertake our work to:

• Confirm the information supplied
• Assist in negotiations
• Comment on the price
• Confirm what is being acquired
• Report to the prospective purchaser or investor

Looking at these in turn:

Confirm the Information Supplied

There would have been information, initially supplied, to allow a decision to be made as to whether to consider a purchase or investment.  This could be in the form of audited accounts, management accounts an Information Memorandum, projections etc.

It is our role to review whatever information is supplied and, where necessary, to challenge the information and test it to establish its accuracy and to provide comfort to the potential acquirer that there is a sound basis on which to go forward.

Assist in Negotiations

The due diligence process may well highlight weaknesses within the financial systems or areas of risk or even misstatement of figures.  By bringing these to the attention of the potential acquirer it enables them to decide which, if any, risks they are prepared to accept and will assist greatly in determining warranties and indemnities.

Comment on the Price

 The purpose of the due diligence process is not to reduce the price to be paid for the acquisition or investment, although it is often seen to be so by both parties to the transaction.  In many cases the price will have been determined by looking at a multiple of maintainable earnings and where the level of these earnings are brought into question in the due diligence process, this give the acquirer grounds to negotiate a price and other terms of the potential deal.

Confirm what is being Acquired

The process will report on the latest balance sheet of the proposed target company in order to assess what is being acquired, and identify any liabilities of the entity.

Report

The terms of the report would have been agreed at the outset of the due diligence exercise and it is now for us to report our findings in a clear and concise way having regard to all matters covered during the process.

So I may be able to sum up the process used in a similar way to the words of Donald Rumsfeld.

“We are investigating and reporting on those things we know we know as well as identifying those things that we currently do not know and setting out our procedures to identify those matters we don’t know we don’t know”.