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Private client briefing for October 2012

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In anticipation of the Autumn Statement and draft Finance Bill 2013 clauses, taxpayers should take this opportunity to get their affairs in order. Two recent FTT decisions impact private client tax: JR Hanson provides the first ruling on what constitutes reasonable care where a taxpayer has engaged an agent to act on his behalf; in Garrett Paul Curran, the FTT decided that interest which had been paid in advance by an individual was fully eligible for income tax relief in the year in which it was paid. An agreement which was recently signed by the UK and US governments clarifies how the FATCA legislation will be implemented in the UK, and a recent French Decree introduces new reporting obligations for trustees.

A good time for house-keeping

Whilst we await the Autumn Statement on 5 December 2012 and draft Finance Bill 2013 clauses on 11 December 2012, clients have an opportunity to put their tax affairs in order.

  • Early tax return preparation ensures advance notice of how much tax is payable, assisting cash-flow planning, and may highlight issues or planning opportunities which can then be dealt with on a timely basis.
  • Clients can consider deferring income so that it is assessed in 2013/14. Possibilities include switching bank accounts to accounts which roll up interest to be paid after 5 April 2013, deferring the payment of bonuses and dividends, and delaying life assurance encashments until after 5 April 2013.
  • For 2012/13, income tax loss claims benefit from maximum relief at 50%, with no restrictions on the allowable amount. Clients should consider crystallising losses and claiming relief in the current tax year, where possible.
  • Donations under gift aid made in 2012/13 can attract 37.5% tax relief on the net donation. This will fall to 31.25% in 2013/14 when the income tax rate is reduced.
  • Make use of the full ISA allowance for 2012/13 to maximise tax free income.
  • Maximise pension contributions in the period to 5 April 2013, subject to the overall lifetime allowance and annual allowance.
  • EIS, SEIS and VCT investments have generous tax breaks, but are higher risk and should be considered as part of an overall investment strategy.
  • Clients should consider using a company as a medium or long-term vehicle to hold income-producing assets. Splitting the share ownership amongst family members may also be appropriate as part of their overall succession planning.
  • Consider bringing forward business expenditure on assets qualifying for capital allowances into 2012/13 to maximise tax relief at 50%.

Why it matters: Getting their affairs in order now will ensure that clients have sufficient time to take advantage of any appropriate planning or opportunities to minimise their tax exposure, and plan their cash-flow.

Advance payment of interest

In the recent case of Garrett Paul Curran v HMRC [2012] UKFTT 517 (TC), the First-tier tribunal decided that interest which had been paid in advance by an individual was fully eligible for income tax relief in the year in which it was paid.

The taxpayer took out loans in 2002, 2003 and 2007 for the purpose of acquiring loan notes in property investment companies. Each of the loans was over a 30-year period, and the borrower took up the lender’s offer to pay all interest arising under the loans in advance, at a discounted rate representing the net present value of the future interest payments. The taxpayer claimed relief for the full amount of interest paid in his self-assessment returns for each of the three years.

HMRC argued that full relief was not available for the interest paid in advance because:

  • the payments were not interest, but capital, because they were:
  • made in lieu of interest payable under the loan agreements; or
  • repayments of the loan principal;
  • the sole or main benefit from the transaction was to obtain a reduction in the borrower’s tax liabilities, and relief was therefore denied by ICTA 1988 s 787 (now ITA 2007 s 809ZG).

The Tribunal disagreed with HMRC’s arguments, and held that relief was available for the full amounts of interest paid in each year.

Why it matters: In appropriate circumstances, other borrowers may be able to structure loan arrangements in a similar way, where there are genuine commercial reasons and obtaining a reduction in a tax liability is not the sole or main benefit. However, the draft legislation with regard to relief capping may include ‘anti-forestalling’ provisions.

Penalties for careless inaccuracies

The recent case of JR Hanson v HMRC [2012] UKFTT 314 (TC) considered whether a taxpayer who had relied on an agent was liable to a penalty under the new penalty regime introduced by FA 2007 in respect of a careless inaccuracy in a tax return. This was the first time the tribunals or courts had considered this.

The taxpayer, Mr Hanson, received loan notes on the sale of his business in 2006, and disposed of them in 2008. With the proceeds he bought a holiday letting property, and his long-standing accountant advised him that CGT holdover relief would be available in respect of the gain on the loan notes disposal. HMRC opened an enquiry into the loan note disposal and it was eventually agreed that holdover relief was not available, resulting in a further CGT liability of £83,278. HMRC charged a penalty of £14,365.56 on the basis that Mr Hanson had made a careless error.

At the First-tier Tribunal the taxpayer relied on FA 2007 Sch 24 para 18(3), which provides that there is no liability to a penalty for a careless inaccuracy if the taxpayer took reasonable care to avoid it. The Tribunal therefore had to consider the definition of ‘reasonable care’ where a taxpayer had engaged an adviser to prepare a tax return.

The Tribunal Judge decided that the appropriate test was that set out in Anderson (deceased) v HMRC [2009] UKFTT 258 (TC): ‘The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.’

The Judge considered that where an inaccuracy in a return is the result of the actions of an agent, what constituted reasonable care would depend on all circumstances, including:

  • the nature of the matters being dealt with in the tax return;
  • the identity and experience of the agent;
  • the experience of the taxpayer; and
  • the nature of the professional relationship between the taxpayer and the agent.

In the Judge’s view, a taxpayer who reasonably relies on a reputable accountant for tax return advice would not be liable to a penalty for careless inaccuracy. However the Judge agreed with the HMRC’s statement in its Compliance handbook manual that a taxpayer cannot simply leave everything to his agent, and stated that a taxpayer will almost always be responsible for a failure to disclose a source of income.

The Judge decided that Mr Hanson did take reasonable care because:

  • he had instructed a reputable firm of accountants who had acted for him for many years;
  • the matters on which he instructed them were within their area of expertise;
  • he had no reason to doubt their competence or their advice that relief was available; and
  • they were in possession of all relevant facts.

Mr Hanson was therefore entitled to rely on their advice.

Why it matters: We do not yet know whether HMRC will appeal the decision, but this is the first ruling on what constitutes reasonable care where a taxpayer has engaged an agent to act on his behalf.

There is speculation that, if it becomes common for taxpayers to use the defence of relying on an agent, the government may consider imposing penalties for agents’ errors on the agents themselves. In any event, the cancellation of a number of careless inaccuracy penalties imposed on clients of a particular agent may well result in an increased HMRC focus on all tax returns submitted by that agent. This would have possible implications for professional fee protection and professional indemnity policies.

FATCA: implications for UK residents

On 12 September 2012 the US and UK governments signed an agreement regarding the US Foreign Account Tax Compliance Act (FATCA), to be phased in over the next few years in conjunction with new UK legislation. This will require foreign financial institutions to report details of accounts held by US citizens to the Internal Revenue Service (IRS). HMRC will act as the reporting channel in respect of accounts held by US citizens with financial institutions in the UK, and in return the IRS will provide HMRC with details of accounts held by UK residents with financial institutions in the US.

Why it matters: US citizens, including those in the UK, will need to ensure that they declare income and gains arising on accounts held outside the US. UK residents will similarly need to ensure that they declare income and gains arising on accounts they hold with US institutions. If individuals have not been fully compliant previously they may need to consider making a voluntary disclosure of any undeclared income or gains, perhaps using one of the disclosure facilities provided by HMRC and the IRS.

French tax: trusts

The publication of Decree 2012–1050 by the French tax authorities may affect UK trustees of trusts which hold property in France. Following the publication of the Decree there are two new forms which must be filed by the trustees when: the trust owns an asset and/or a right located in France; and the settlor and/or a beneficiary is tax resident in France.

1. Annual declaration: The declaration, containing details of the trust, trustees, settlor, beneficiaries and trust assets and income, must be filed annually by 15 June from 2013. (For 2012, the declaration was due by 30 September 2012.)

2. Occasional declaration: A  return must also be filed upon constitution or winding-up of a trust or when an ‘event’ occurs, including a modification of the trust terms, removal, death or addition of the settlor, beneficiaries or trustees, new assets added to the trust or distributed and, more generally, any event that alters the running of the trust. The declaration, containing similar details to those required in the annual declaration, together with details of the event giving rise to the declaration, must be filed within one month of the event. For 2012 the deadline to declare the existence of the trust is 31 December 2012.

Why it matters: Failure to comply with these requirements triggers a penalty of €10,000 or 5% of the value of the entire assets of the trust, whichever is higher.

Wendy Walton, head of private clients, BDO LLP

Gemma Davies, senior tax manager, BDO LLP