INHERITANCE TAX. Semi-Retirement - Is it an option? VAT and Residential Buildings Meet the Dyke Yaxley Tax Planning Team ON THE RIGHT TRACK

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1 ISSUE 14 ON THE RIGHT TRACK AGRICULTURAL SERVICES FROM DYKE YAXLEY INHERITANCE TAX Semi-Retirement - Is it an option? VAT and Residential Buildings Meet the Dyke Yaxley Tax Planning Team

2 WELCOME SEMI-RETIREMENT - IS IT AN OPTION? WELCOME AS I SIT AND LOOK AT THE IMPACT OF THE RECENT STORMS, I HAVE TWO THOUGHTS CROSSING MY MIND. FIRSTLY, HOW quickly 2013 HAS GONE BY; ANOTHER HARVEST HAS BEEN COLLECTED AND WHILST THE CROPS MAY HAVE NOT BEEN AS GOOD AS HOPED, IT WAS CERTAINLY A LOT EASIER THAN THE PREVIOUS YEAR. SECONDLY, IN THE LIGHT OF THE LATEST MATCH FIXING SCANDAL, I AM SURE I COULD FIND PEOPLE WILLING TO BET ON WHICH WILL BE THE NEXT TREE TO FALL OVER! UNDOUBTEDLY A MARKETING STRATEGY THAT NEEDS TO BE PURSUED, POSSIBLY IN THE FAR EAST IN THE SPRING! SOMEHOW I DOUBT I WILL GET THAT PAST THE POWERS THAT BE! Semi-Retirement Is it an option? THE STORY SO FAR... Fed up with the weather, the effects of TB on his beef herd, the mountain of paperwork and a general decline in his health, Raymond decides to sell his beef herd. After all, he reasoned he is not getting any younger, the children are distinctly unenthusiastic about the prospect of coming home to help, let alone take on the farm, so why put in all the effort? He has neighbours who seem to be expanding and would be glad of his acres so he will not be without income. In due course he may sell up anyway and move to somewhere easier to manage. He has chatted to his neighbours and they have offered the following solutions: Put stock on his farm and use his buildings on an informal basis. Maybe grow some corn and take a cut or two of silage Get the local auctioneers to draw up a grass-keep agreement A contracting agreement Raymond wants to keep any tax bill on the sale of his farm to a minimum, so ahead of any changes he goes to see his accountant, Charles. At the meeting: Charles it s good you came before you made any changes as that gives us more options. Capital Gains Tax will arise on the sale of your farm. The rate will depend on your income in the year of the sale, either 18% or 28%. If you are eligible for Entrepreneurs Relief this reduces the rate to 10% on the first 10 million of gain. MARK GRIFFITHS Over the last twelve months the agricultural industry has moved on from the wet and mud of the previous year and we have also seen Case Law in various Inheritance Tax cases come and go. In this edition of On The Right Track we re-explore the farmers options as they come up to retirement, the impact of the new farmhouse cases and the reversal of fortunes in the debate for furnished holiday lets getting tax relief. With tax expert Tony Elliott joining Dyke Yaxley s Tax Planning Team, I thought it would be a good time to introduce the team to you all and explore the services we can offer our clients through their unique insight into the tax world in which we all live. As I said at the start, 2013 has passed very quickly and it only leaves me to wish you, on behalf of the team here, a very successful Mark Griffiths Charles to qualify you must sell assets used for the purpose of the trade within 3 years of the cessation of the trade. Raymond so if I do not know how long I am going to live at the farm after I have sold the herd, I need to keep trading so I can remain within the 3 year timeframe. Charles - yes, you need to have a well-defined written agreement, with each party s responsibilities clearly documented, where the acts of husbandry are identified and left with you, so you can be identified as the farmer. Not only do you need both parties to sign the agreement, you also need to actually carry out the tasks, as HMRC will need to be satisfied it is not just a sham. Raymond so my income will still be subject to the financial risk of the farm operations failing and I will have to direct and control the contractors. That does not sound like much of a rest! Charles go and discuss it with your family, may be you would be best making plans to move within 3 years, otherwise there could be an extra 18% of tax on the sale of your property. If you have any plans to retire in the near future please talk to us first.

3 FINANCE ACT 2013 Finance Act 2013 INHERITANCE TAX For inheritance tax calculations it will no longer be possible to take a charge on Property A for the purposes of a loan on Property B and expect that the liability will be deducted from the asset carrying the charge. Example If more farm land was being purchased and a loan was taken out charged against residential property, then up until now, on death, the value of the residential property in the IHT calculation would have been its market value minus the loan charged against it. For new loans from 20 March 2013, when doing the calculations, the residential property will be chargeable in full and the amount of the loan will come off the value of the property, (the farm land in this example) it was taken out to finance. This new rule will reduce the reliefs available to a deceased estate. With Funding for Lending offering some low cost borrowing opportunities, this may be a good time to review your financing arrangements. Review your IHT planning to check the impact of this change. INHERITANCE TAX NIL RATE BAND The IHT nil rate band was to remain frozen at 325,000 until 5 April The band will now stay at that level until 5 April The freezing of the nil rate band will mean that even basic inflationary growth in the value of assets in an estate will increase IHT liabilities. Consideration should be given to making lifetime gifts to reduce liability. NATIONAL INSURANCE 2,000 employment allowance The Government will introduce an allowance of 2,000 per year for all businesses and charities to be offset against their employer Class 1 NIC liability from April The allowance will be claimed as part of the normal payroll process through Real Time Information (RTI). The government calculates that every business will be able to employ one worker on a salary of 22,400 or four employees working full time on the adult National Minimum Wage without paying any employer NICs at all. CAPITAL GAINS TAX RATES The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The rate for disposals qualifying for Entrepreneurs Relief is 10% with a lifetime limit of 10 million for each individual. Capital Gains Tax annual exemption The CGT annual exemption is 10,900 for 2013/14 and will be increased to 11,000 for 2014/15 and 11,100 for 2015/16. Before the end of each tax year ensure that you have utilised this allowance especially if your stocks and shares carry a capital gain. IDEAS TO SAVE INHERITANCE TAX ON FURNISHED HOLIDAY LETS IN THE LAST FEW EDITIONS OF THIS NEWSLETTER WE HAVE FOLLOWED THE CASE OF THE PERSONAL REPRESENTATIVES OF A FAMILY SEEKING TO CLAIM THAT HOLIDAY LETTING WAS A TRADE ELIGIBLE FOR BUSINESS PROPERTY RELIEF AND THEREFORE FREE FROM INHERITANCE TAX. THE UPPER TRIBUNAL FOUND FOR HMRC AND REGARDED THE ACTIVITY AS ONE OF MAKING OR HOLDING INVESTMENTS. UNLESS THERE ARE FURTHER APPEALS, HERE ARE TWO ALTERNATIVE APPROACHES TO INHERITANCE TAX PLANNING FOR FURNISHED HOLIDAY LETTING PROPERTIES. 1 2 Holiday lets on a farm could be regarded as part of the total farm business. The farm accounts should include the holiday letting income, and a stronger case can be made if one of the selling points of the cottage is that they are farm based. In these cases HMRC have to look at the whole (farming enterprises and holiday let together), and judge if the activities are mainly the making or holding of investments. The downside of this single business arrangement will be the need to include the holiday rental income in the VAT outputs. When compared to non-vat registered neighbouring properties, the rent will either be 20% greater, or more likely the unified business will have to suffer lower returns than a business below the VAT threshold. Transfer the FHL as a lifetime gift, making use of Capital Gains Tax hold-over relief and hope the donor will survive 7 years. Before you go ahead with any gifts or transfers consult your tax adviser to ensure you meet the eligibility criteria for any reliefs mentioned.

4 CAP ON UNLIMITED TAX RELIEFS ANOTHER IHT CASE FOR THE TAXPAYER CAP ON UNLIMITED TAX RELIEFS ANOTHER INHERITANCE TAX CASE FOR THE TAXPAYER WITH EFFECT FROM 6 APRIL 2013, TAXPAYERS SEEKING TO OBTAIN MORE THAN 50,000 OF PREVIOUSLY UNLIMITED INCOME TAX RELIEFS IN ANY ONE YEAR WILL FIND THEIR DEDUCTIONS CAPPED AT THE GREATER OF: 25% of their total income; or 50,000 The most common relief affected will be trading losses, so careful consideration will need to be given to the taxpayer s affairs as a whole to ensure relief for any loss is maximised. The timing of any large items of expenditure which may give rise to a trading loss will also need to be considered. This is especially so in relation to purchases of plant and machinery as we currently have an increased Annual Investment Allowance of 250K. Hopefully farm incomes will hold up, but the silver lining of big tax rebates in poor years may be tarnished for some by this restriction. The restriction also covers relief claimed for interest on loans taken out to invest in a company or partnership in which the individual works. Any interest that cannot be relieved due to the restriction will be lost. The cap will not apply to SEIS, EIS, VCT, pension contribution reliefs, or charitable donations. Please contact us if you have any queries about these restrictions. BUT HMRC MAY APPEAL In the Hanson case the Tribunal had to decide if the farmhouse passed the character appropriate test in order to make it eligible for Agricultural Property Relief (APR). One of the principles to be considered was whether the house was proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land or pasture in question. APR is a relief that requires occupation for the purposes of agriculture. The Tribunal decided that the character appropriate test would be better answered by reference to the land in the same occupation as the farmhouse. Rather than just considering the land owned by the deceased, the tribunal considered the area of land that was in the same occupation as the farmhouse without necessarily being in the same ownership. The land occupied by the resident of the farmhouse land ran to some 215 acres while the owned land only amounted to 61 acres. Following this case, landlords may be interested in establishing what additional land is farmed by their tenants if questions arise about the character of the farmhouse. Follow this link to download the full document: Agricultural Technologies Strategy - July 2013 The government has launched a new strategy, developed with scientists and the food and farming industry, and backed it with 160 million. It is hoped that the proposed Centres of Agricultural Innovation will help drive knowledge to those working in the industry

5 OUR TAX PLANNING TEAM An introduction to our Tax Planning Team WHETHER YOU RE RUNNING YOUR OWN BUSINESS, OR JUST DEALING WITH PERSONAL TAX ISSUES, KEEPING UP-TO-DATE WITH THE EVER-CHANGING TAX LAWS CAN BE A CHALLENGING. The Tax Planning Team at Dyke Yaxley works with clients from a range of industry sectors, providing expert advice and tax planning services. With tax legislation becoming even more complicated, it s important to seek professional advice in order to optimise your tax position and ensure you meet all the compliance requirements. Our aim is to provide innovative strategic planning and proactive advice which will add value to your business. Pam Mason Tax Planning Consultant pam.mason@dykeyaxley.co.uk Tony Elliott Senior Tax Planner tony.elliott@dykeyaxley.co.uk Having been a successful Shropshire-based business owner for 18 years before switching to a career in accountancy, Tony presents clients with a unique and insightful perspective. His experience as a businessman means he has real empathy with clients and the day-to-day challenges they face; and particularly the need to maximise tax allowances. Tony joined Dyke Yaxley in October 2013 having spent 4 years working as Tax Director for a large firm of accountants in Birmingham. Tony provides technical expertise on a wide range of taxation matters including inheritance and capital gains tax planning for business owners and high net worth individuals. He also assists with income tax mitigation using tax efficient investment opportunities. Tony also has a wealth of VAT experience and provides practical advice and planning solutions, particularly in the complex property and construction sector. Current key tax issues: Tax Planning is an integral piece of a proper financial plan and there are always new laws and changing provisions. Key changes in 2014 include the reduction in the pension contribution annual allowance and HMRC s attack on partnerships containing a mix of personal and corporate members. It is essential that you talk to your advisers in the early part of 2014 to ensure that you will not be affected. Pam has worked in accountancy for over 25 years and has gained a wealth of experience with local firms of Chartered Accountants in Shrewsbury and Telford. Pam joined Moore Stephens to specialise in tax matters and after the takeover by Dyke Yaxley; she became manager of the Tax Department in May She now specialises in corporate tax planning. As Tax Planning Consultant, Pam supports clients with strategic tax planning, corporate advice, remuneration planning, business succession planning and Inland Revenue enquiries. In addition to this, Pam also works proactively with limited companies, individuals and other organisations in order to minimise their tax liabilities. Current key accountancy issues: Need to make sure clients get the best advice and to review this advice regularly in the ever-changing world of tax legislation; and make sure they are as tax efficient as they can be. There is a reduction to Principal Private Residence relief coming in from April 2014 which may affect someone having trouble selling a property and from January 2015 the Annual Investment Allowance for capital purchases returns to 25,000. If you are planning any large capital expenditure please speak to your adviser. Les Cox Tax Consultant les.cox@dykeyaxley.co.uk Les originally worked for a well-respected legal practice in Shrewsbury, before changing direction and entering the accountancy profession in He joined the Dyke Yaxley Tax Department in 1994 and has gained a wealth of experience working with clients from a wide variety of industry sectors, covering all aspects on taxation and tax planning issues. As Tax Consultant he advises clients on strategic tax planning and in particular Trust and Estate planning, including post-death inheritance tax planning. He also has valuable experience in tax mitigation and dealing with Inland Revenue enquiries. Current key tax issues: Diversification in the farming sector is a key factor to sustain profitability. Renewables, such as wind, solar, hydro and anaerobic digestion can produce a vital income stream for many farmers but can also influence the availability of valuable tax reliefs. Protecting IHT reliefs is high up on the farming agenda. Modern methods of operation (FBT, grazing licences, contract farming) are all intended to protect availability of APR on valuable farmland, but often the reality of the operation differs from the wording in the agreements giving HMRC grounds for enquiry. We would recommend that a review is carried out to ensure protection of tax reliefs.

6 VAT AND RESIDENTIAL BUILDINGS CONTACTS VAT and Residential Buildings The content of this newsletter is for general information only. It should not be relied on and action should not be taken without appropriate professional advice. THE CONSTRUCTION OF A NEW HOUSE IS zero RATED. A REDUCED RATE OF 5% IS AVAILABLE FOR WORK DONE IN CONVERTING A NON-RESIDENTIAL BUILDING (INCLUDING A FARM BUILDING) FOR USE AS A RESIDENCE. This reduced rate also applies for the conversion of residential buildings into a number of different units. The key to achieving the favourable VAT rates is to comply with VAT Notice 708 and fulfil the following requirements for a Single Household Dwelling which must be: Designed for occupation by a single household either as a result of being originally constructed for that purpose, or as a result of adaption; Consists of self-contained living accommodation; Has no provision for direct internal access to any other dwelling or part of a dwelling; Is not prohibited from separate use by the terms of any covenant, statutory planning consent or similar provision; and Is not prohibited from separate disposal by the terms of any covenant, statutory planning consent or similar provision. Mark Griffiths mark.griffiths@dykeyaxley.co.uk DIRECTOR Ian Walsh ian.walsh@dykeyaxley.co.uk DIRECTOR Lynda Lee lynda.lee@dykeyaxley.co.uk AGRICULTURE MANAGER TAX PLANNING TEAM Les Cox les.cox@dykeyaxley.co.uk Tony Elliott tony.elliott@dykeyaxley.co.uk Pam Mason pam.mason@dykeyaxley.co.uk 1 Brassey Road Old Potts Way, Shrewsbury Shropshire SY3 7FA Telephone Fax Hollinswood Court Stafford Park 1, Telford Shropshire TF3 3DE The first two points are relatively straight forward; the third precludes annexes and extensions but the fourth and fifth points can lead to practical problems. Careful scrutiny of the planning consent is needed to ensure that the correct rate of VAT applies to the construction costs. Remember to think about VAT issues when considering any plans to develop property. If you have queries contact us well in advance. Agricultural occupancy conditions on their own do not lead to difficulties, but watch any additional clauses attached to the consent. Telephone Fax info@dykeyaxley.co.uk