The View from No 50

 

 

 

 

January 2010

K P Bonney & Co

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston

Ilkley  LS29 6JA

Tel:  01943 870933

Fax:  01943 870925

Email:  keith@kpbonney.co.uk

www.kpbonney.co.uk

 

 


 

FLYING THE NEST

 

House prices have fallen from their peak of a few years ago but with high unemployment and job insecurity it is as hard as ever for youngsters to get that first foothold on the housing ladder.

 

Increasingly parents are looking for ways to help their children to find their independence.  Son or daughter will usually be grown up but for convenience they are referred to in this piece as the child.

 

There are a number of ways of structuring a home ownership arrangement for a child. 

 

·          The parent can buy and own and the child can occupy.

 

·          The parent can provide the finance and the child can own and occupy.

 

·          The parent can fund a trust and the trust can buy and the child can occupy.

 

The issues for families to consider here are, amongst others, the attitude to giving wealth away, whether or not to charge a rent and the tax aspects of these arrangements.  As this is a newsletter about tax let us focus on that.  What are the tax considerations?

 

Income tax

 

This is only an issue if the owner charges rent.  The owner is chargeable to income tax on rents earned.

 

In a family arrangement it would be unusual to charge rent as the parent would be chargeable to tax and the child would get no tax relief.

 

However, if the parent has to borrow in order to fund the acquisition of the property, a case could be made for charging a rent equal to the interest on the loan as the interest is deductible from the rental income for tax purposes.

 

Capital gains tax

 

This is only an issue at the time of disposal of the property.

 

We are all vaguely aware that when you sell your home any gain you make is exempt from tax.  As a basic rule this is correct but as with all basic rules there are exceptions.

 

If the parent owns the property and the child occupies it, the parent is chargeable to tax on any gain made on disposal.  This is so because the owner has not occupied the property as a home.  On the positive side, however, a parent who bought a house at the top of the property market is now nursing a hefty loss and the consolation here is that any loss on sale is relievable against any gains of the same or future years.

 

If the child owns the property the gain on disposal is exempt because the owner has occupied the property as his or her home.

 

If the parent sets up a trust and funds the purchase of the property through the trust, any gain made on the disposal of the property is exempt from tax provided the child is entitled to occupy the property under the terms of the trust.  So this form of ownership delivers the best of both worlds in that it allows the parent to retain control of the property whilst avoiding the capital gains tax liability on disposal.

 

Inheritance tax

 

If the parent owns the property and the child occupies it, the parent does not suffer a diminution in the value of his or her estate.  So the question of inheritance tax does not arise.

 

If the parent provides the funds for the child to buy the property the parent suffers a diminution in the value of his or her estate so inheritance tax is in point.  As the gift is to an individual it is what is called a potentially exempt transfer.  This means provided the parent donor survives for a period of seven years from the date of the gift there is no inheritance tax to pay.  If, on the other hand, the donor does not survive, the original value of the gift is deemed to form part of his or her estate on death and inheritance tax is calculated accordingly.

 

If the parent sets up a trust to buy the property there could be a charge to inheritance tax at that time.   A transfer to a trust is an immediately chargeable transfer.  However, whether there is an actual liability depends on the circumstances of the parent donor.  In a nutshell, if the donor has made chargeable transfers of £325,000 or more in the preceding seven years there will be a liability.  If the donor has made no chargeable transfers in the preceding seven years and the value of the transfer to trust does not exceed £325,000 there will be no immediate liability and provided the donor survives for seven years there will be no liability at all.  There are ways in which any immediate liability can be managed.  Depending on the figures there could be a small charge on each tenth anniversary of the setting up of the trust.

 

Our Advice:  Not all parents will share the same attitude to helping their children.  But once you have taken the decision to help it is important to understand the tax advantages and disadvantages of the various ownership options.  If this subject is of interest to you we should be pleased to help you with your planning.

 

JOBSWORTHS’ DELIGHT

 

There have been occasions in the past when, for the most obscure reasons, the jobsworths at Companies House have rejected our submissions of accounts.   These guys must be jumping for joy because they now have a new reason to justify their existence.  With effect from October 2009, if your accounts are not signed in black ink they will be turned around and sent back to you.  Sorry, blue ink just isn’t acceptable.  Henry Ford rules OK.

 

How can such a piece of nonsense ever make it on to the statute books?  Where were our MP’s when this ridiculous proposal passed through? 

 

Probably busy filling in their expenses claims!

 

JUST WHEN YOU THOUGHT YOU WERE SAFE…

 

Self assessment arrived in 1996/97.  Since then HMRC has been able to make enquiries into tax returns during the ‘enquiry window’.  In recent years that enquiry window has been a period of twelve months following the submission of your tax return.  So if you filed a correct and complete 2007/08 tax return on 30 November 2008 and you didn’t receive an enquiry notice by 30 November 2009 you could rest easy in the knowledge that HMRC could not enquire into that return.

 

In April 2009 these enquiry powers were enhanced.  If it hasn’t already issued an enquiry notice HMRC can now issue a ‘taxpayer notice’. It can do this at virtually any time including the time before you submit your return and after the closure of the enquiry window.

 

This is a significant increase in HMRC’s information gathering powers.

 

The only requirement HMRC must satisfy before it issues a taxpayer notice is that the information or document it seeks is ‘reasonably required…for the purpose of checking the taxpayer’s tax position’.

 

The point to appreciate is that if you receive one of these notices it is because HMRC knows something.  How could it know something?  Because it has similar powers to obtain information from third parties (banks are the obvious example but it could be any organisation or person) and it could be that the information supplied by a third party relates to you.

 

Time will tell whether the information is of good quality and whether it is used well.  There are often quite innocent explanations for transactions or circumstances which may at first sight appear strange.

 

Grandad died a few years ago.  Up until his death he had been paying into a stakeholder pension for his grandson.  Grandson scrapes a living running a market stall.  The existence of the pension fund comes to the attention of HMRC through a third party information notice.  If you were an HMRC officer wouldn’t you think an explanation of the source of the funds was reasonably required to establish whether grandson is declaring all his income?  An opening like this could lead to all sorts of problems.

 

Our Advice:  Keep your nose clean.  Keep your records.  Consider professional fee protection. I just happen to be renewing my PFP scheme right now.  Get in touch.

 

FAIRY STORY

 

Sitting in a compartment on a train were the tooth fairy, an expensive football agent and a cheap football agent.  On a table between them was a briefcase full of money.

 

Suddenly the train entered a tunnel and everything went dark.  When the train exited the tunnel and the light returned the briefcase was gone. 

 

Who took the briefcase?

 

Well, it’s obvious really.  It had to be the expensive agent as there is no such thing as the tooth fairy or a cheap agent.

Copyright:  K P Bonney & Co LLP 2010.  All rights reserved.  No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer:  The publishers have taken all due care in the preparation of this publication.  No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.

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