Currently viewing the tag: "avoidance"

The Chancellor, George Osborne has used the budget to drop a huge bombshell on the UK mortgage industry.

Buying UK residential properties through a company or offshore trust has been actively promoted by intermediaries, as this helps their clients avoid large stamp duty bills, particularly when using bridging finance or making cash purchases. This practice has been perfectly legal and acceptable…until now!

During yesterday’s budget the chancellor announced a 15% rate of stamp duty applied to residential properties over £2 Million (GBP) bought under a corporate envelope ; a consultation on the introduction of a large annual charge on those £2 Million (GBP) residential properties which are already contained in corporate envelopes; and, to ensure that wealthy non-residents are also caught by these changes, a capital gains tax on residential property held in overseas envelopes.

Mr Osborne confirmed that the government will consult on the details of a general anti-avoidance rule and legislate for it in next year’s Finance Bill. Stating that he found “…tax evasion and aggressive tax avoidance…morally repugnant”.

The chancellor also signalled that the government may even act retrospectively on avoidance measures including the use of companies and offshore trusts to avoid stamp duty.

He said: “A major source of abuse – and one that rouses the anger of many of our citizens – is the way some people avoid the stamp duty that the rest of the population pays, including by using companies to buy expensive residential property. I have given plenty of public warnings that this abuse should stop. Now I’m taking action.”

The chancellor’s move is reported to have come about following a recommendation by Graham Aaronson QC that such a rule would improve the government’s ability to deal with tax avoidance without damaging the competitiveness of the UK as a place to do business.

Mr Osborne added: “I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned.”

Director of the Association of Mortgage Intermediaries, Robert Sinclair, said: “I’ve been saying for a long time that those promoting this avoidance will get us into trouble. But most worrying is that this is the first time I’ve ever heard government say that they’ll come and do you for something retrospectively. I think the move from avoidance being acceptable to morally repugnant is probably the single biggest shift in the British tax system I’ve seen in my lifetime. The question will be where we draw the line given that there are schemes that actively promote avoidance such as the ISA.”

Miranda Cass, tax partner at Bristows, said the introduction of a general anti-avoidance rule should be welcomed by all but the most aggressive of tax planners provided that legitimate tax arrangements are not affected. The full implications of the rule have not been analysed yet but any risk that this rule will make transactions more difficult or more costly to plan for or to carry out will be a serious impediment to any growth in the economy. For the Chancellor to be introducing new and complex rules at the same time as drastically cutting the number of staff at HMRC does not make for a happy combination. Advisers are bound to be concerned that for every aggressive tax scheme this rule defeats, it will hinder or prevent two or three perfectly innocent transactions.”

A landmark tax tribunal case has ruled that owners of holiday homes who let them out will be able to claim business property relief and reduce their Inheritance Tax (IT) bills.

This is in contrast to Buy-To-Let properties which are not treated as businesses, despite pressure from groups such as the Residential Landlords Association (RLA).

HMRC had tried to categorise holiday lets with other Buy-To-Let and rental properties, which attract 40% IT on the owner’s death.

However, a tax tribunal dismissed the taxman’s argument that furnished holiday lets should not be considered a business for IT purposes.

It also argued that relief should only be given when the owner had ‘substantial involvement’ with the holidaymakers, and that an ‘intelligent businessman’ would not consider holiday lets to be investments.

Following the ruling, owners of holiday lets will now be able to claim business property relief, which in turn provides relief from IT.

Although the ruling concerned a UK property, it could have implications for those who let properties overseas.

Stephen Barratt, private client director at accountants James Cowper, said the ruling was particularly interesting as there was no clear evidence that the owner in this case had had substantial involvement with the holidaymakers.

Barratt said: “While HMRC can be expected to take their arguments to the Upper Tier Tribunal, as it stands the decision is good news and could open the door to a flood of claimants who have been awaiting the verdict. It could also give people greater certainty in planning their affairs.”

Her Majesties Revenue & Customs is set to mount a court challenge to determine the legality, or otherwise, of stamp duty tax avoidance schemes.

Central to the challenge will be the use of limited companies to buy properties, and then sell them to individuals – something which does appear to be completely legal.

Essentially, the purchaser sets up a Special Purpose Vehicle, a company or a trust with a property as its sole asset. The purchaser then buys shares in the company and is subjected to a tax rate of just 0.5%.

There are many companies offering stamp duty tax avoidance: a Google search yielded over 3,200 results.

The taxman’s move follows this year’s Budget when Chancellor George Osborne announced that he would be clamping down on stamp duty avoidance, whilst law firms have also warned that HMRC is on the prowl.

HMRC estimates the tax avoidance schemes have cost it millions in lost revenue. It is investigating 1,200 people it suspects of having underpaid stamp duty by a collective total of £35m, whilst it will also go after others who have avoided the tax altogether.

The many schemes that claim to legally exploit stamp duty loopholes frequently charge fees of around half the amount that would have been paid in tax.

It is thought that a number of property investors have set up a limited liability company to buy the property to sell back to the individual.

An HMRC spokesperson said: “The schemes rely on an interpretation of law that produces an outcome different from that envisaged when the law was enacted, and that HMRC does not accept.”

Many Law firms have also warned against avoidance schemes of Stamp Duty Land Tax (SDLT).

Ian Montgomery, a solicitor at Boodle Hatfield, said: “There is a growing belief that it is possible to avoid paying stamp duty on the purchase of a property or land, but unless particularly aggressive tax planning is undertaken that is just not the case. It is a common misconception that it is possible to purchase a property using a company and avoid stamp duty. When a property is purchased through a company, whether based offshore or in the UK, it pays the same rate as if it were an individual. SDLT may be avoided by future purchasers when the company decides to sell the property. This is done by the owner selling shares in the company rather than the property itself, but SDLT will be paid on the initial purchase.”

Stamp duty on the purchase of shares stands at 0.5%, rather than the higher rate levied on property. If the company is based offshore, the purchase of shares is exempt from stamp duty entirely.

People who try to reduce stamp duty by paying separately for fixtures and fittings may have to prove to the taxman that what they paid for these assets did not exceed their true value

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Her Majesty’s Revenue & Customs (HMRC) is mounting a legal challenge to stamp duty tax avoidance schemes set up for home buyers.

Central to George Osbourne and the Taxman’s challenge will be the use of private limited companies to buy properties, and then sell them to individuals – something which is currently completely legal.

Essentially, the purchaser sets up a Special Purpose Vehicle, (SPV), a company or a trust with a property as its sole asset. The purchaser then buys shares in the company and is subjected to a tax rate of just 0.5%.

A Google search yielded over 3,200 results of companies offering stamp duty tax avoidance.

HMRC’s move follows this year’s Budget when Chancellor George Osborne announced that he would be clamping down on stamp duty avoidance, whilst law firms have also warned that the Taxman is on the prowl.

HMRC estimates the tax avoidance schemes have cost it millions in lost UK revenue.

It is investigating 1,200 people it suspects of having underpaid stamp duty by a collective total of £35 Million (GBP), whilst it will also go after others who have avoided the tax altogether.

Thousands of websites offer schemes that claim to legally exploit stamp duty loopholes. The schemes frequently charge fees of around half the amount that would have been paid in tax.

Loopholes include the well-known dodge of paying an artificially high price for fixtures and fittings so that the price of the property itself falls below a certain threshold; or setting up a limited liability company to buy the property to sell back to the individual.

An HMRC spokesperson said: “The schemes rely on an interpretation of law that produces an outcome different from that envisaged when the law was enacted, and that HMRC does not accept.”

Ian Montgomery, solicitor at Law firm Boodle Hatfield, said: “There is a growing belief that it is possible to avoid paying stamp duty on the purchase of a property or land, but unless particularly aggressive tax planning is undertaken that is just not the case. It is a common misconception that it is possible to purchase a property using a company and avoid stamp duty. When a property is purchased through a company, whether based offshore or in the UK, it pays the same rate as if it were an individual. SDLT may be avoided by future purchasers when the company decides to sell the property. This is done by the owner selling shares in the company rather than the property itself, but SDLT will be paid on the initial purchase.”

Stamp duty on the purchase of shares stands at 0.5%, rather than the higher rate levied on property. If the company is based offshore, the purchase of shares is exempt from stamp duty entirely. So, on a residential property valued at £2m, the purchaser could thus save £90,000 from purchasing the shares in a UK company holding the property as opposed to purchasing the property direct.

People who try to reduce stamp duty by paying separately for fixtures and fittings may have to prove to the taxman that what they paid for these assets did not exceed their true value.

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