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The private client briefing for September 2011

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Key recent developments include debate on replacing the 50% tax rate and possibly more property based taxation. There is a consultation on restricting losses, especially those connected with capital allowances and the Forbes case has confirmed existing restrictions. The rest of the article concerns charitable legacies and the proposed new 36% IHT rate as well as IHT on ‘farmhouses’ and other rural properties following the Golding case.

Taxation of very high value property

The summer months were full of the fallout from the spring Budget with the issue of a flurry of consultation documents.

However, nothing further officially was said on one of the most eye-catching comments in George Osborne’s Budget Speech concerning the reference to ‘redoubling our efforts to find ways of ensuring that owners of very high value property cannot avoid paying their fair share’ at the same time as reviewing the 50p tax rate.

While a 36% IHT rate on estates where charitable legacies exceed 10% of the total estate looks attractive, it has all the hallmarks of a gimmicky proposal.

This issue has not been the subject of any formal consultation but has instead been played out in broadsheet newspapers, on news channels and websites, in the letters page of The Times and the Financial Times and on social media.

The implication is that should the 50p income tax rate be reduced then a further asset based tax would be introduced, possibly a ‘mansion tax’ or other forms of wealth tax.

Based on press comment then this is the price of Lib Dem support for any reduction in the 50p rate but it seems it may also receive the support of many Conservative party voters.

Why it matters: While the implications of any reduction in the 50% income tax rate would clearly be significant, the impact of any increase in property taxation should not be ignored.

Private clients with substantial asset wealth in the UK could suffer from the introduction of a wealth tax and the design of any relief for business and agricultural assets will clearly need careful consideration.

The status of trust assets will also be important.

It is too early to implement any mitigating tax planning (although clients are asking) but in general clients with substantial assets that may not qualify for any relief – such as let properties – need to start assessing their options.

Valuation of assets will be key and anything that can therefore be done to reduce the value of assets (such as company ownership) or to spread assets around a family, will need to be considered. Watch this space!

Forbes case and the loss relief ConDoc

One consultation document that was issued is entitled High-risk areas of the tax code: relief for income tax losses (available via

This was issued on 30 June and the consultation period closes on 30 September 2011.

While income tax loss relief is primarily designed to provide a relief for business losses, the consultation suggests that in HMRC’s view these reliefs are being exploited by private individuals to shelter tax liabilities.

The document considers options for restricting income tax loss relief through:

  • principle-based legislation;
  • mechanistic rules; and/or
  • the administration of the claims themselves.

One possibility would be to restrict all income tax loss claims to a maximum of £25,000.

The document makes clear a particular dislike of losses related to property businesses and in particular those caused by capital allowances.

It is therefore timely that the case of GB Forbes v HMRC TC01278 has also been heard in the last few months.

This concerned an attempt to claim losses caused by capital allowances in respect of a power boat chartering business.

The point is that ITA 2007 s 75 prohibits losses generated by capital allowances in a leasing trade unless the individual devotes substantially the whole of his or her time to the carrying on of the trade.

Why it matters: This case is a timely reminder of an aspect of the income tax legislation that is not well understood in practice.

For boat chartering it is considered by HMRC that unless the individual concerned actually skippers the vessel (or provides a skipper with the vessel) then he or she will not meet the required time commitment test.

This case confirmed that view but did allow for the charters to be split between those that were ‘bare boat’ and those where a skipper was provided by Mr Forbes.

For the years between 2001 and 2006 the proportion of skippered charters varied from 80% to 32% and an appropriate apportionment of losses generated by capital allowances was allowed to that extent.

Charitable giving and IHT

Another two consultation documents that were issued over the summer concerned gifts of pre-eminent objects and works of art to the nation (available via and the proposed new reduced rate of inheritance tax for charitable legacies (, the latter being of more widespread significance.

Why it matters: While a 36% IHT rate on estates where charitable legacies exceed 10% of the total estate looks attractive, it has all the hallmarks of a gimmicky proposal.

It suffers from a cliff edge nature and in any case the complexity of inheritance tax on estates means that it is very hard to structure this relief in a practical way.

Particular problems arise where there is settled property and the method of calculation means that the threshold increases where there have been lifetime gifts that reduce the nil rate band on death.

The ICAEW Tax Faculty has issued a response to this consultation document (TAXREP 47/11) which instead proposes a tax credit approach of 3.6% in the inheritance tax calculation.

The CIOT has also raised concerns about the complexity of this proposed new relief.

While the rules are not yet in place, wills are currently being drafted which may have to be implemented after any rule change.

STEP have already issued precedent clauses for use in the drafting of wills and this is a ‘live’ issue for those trying to advise clients on the distribution of their estates.

The current position is unsatisfactory.

Falling (and failing) investments

The recent stock market falls have again highlighted the need for careful consideration of loss planning. In particular it is important that portfolios are reviewed to identify shareholdings that may be considered to be unquoted for tax purposes (including the Alternative Investment and Plus Markets) and where the shares were subscribed for at the time of acquisition.

In such cases the losses on disposal may be eligible for income tax relief in accordance with ITA 2007 s 131.

Separately, there has finally been progress on the provision of compensation for maladministration and poor regulation of Equitable Life.

In a nutshell authorised compensation payments are ignored for tax purposes. Further details are contained in HMRC Brief 26/11.

Why it matters: It is easy to miss the loss relief opportunity under s 131 and indeed in practice, the costs of identifying it often outweigh the benefits.

However, it is important that it is considered. There will also be opportunities to crystallise capital losses more generally to shelter any gains that may have been made.

Many private clients had Equitable Life products in the past and assisting them with the compensation process and answering queries will be a feature of professional life over the next couple of years.

Another farmhouse case

Also this summer, the decision in another farmhouse case was released.

This was A F Golding and J A Middleton (executors of the Will of Dennis Golding Deceased) (TC01211) and it concerned a claim for agricultural property relief in respect of a farmhouse where the agricultural land held with the property was only 16.29 acres.

HMRC had refused the claim for agricultural property relief but the appellants were successful at the First-tier Tribunal.

Why it matters: IHTA 1984 s 115(2) requires that in order for agricultural property relief to be available on a farmhouse it must be ancillary to the agricultural land and be of a character appropriate to the property.

This decision rolls back the HMRC attack on claims for agricultural property relief on many rural properties|

The extent of the agricultural property relief is then limited to the agricultural value of the property concerned.

Prior to this decision few advisers would have been comfortable to still suggest that a farm as small as 16.29 acres could support a claim for agricultural property relief on a house on the property as a farmhouse.

So to that extent the decision is very welcome and rolls back the HMRC attack on claims for agricultural property relief on many rural properties.

However, the key points in the decision would seem to be that the deceased had farmed the land since the war and that the property was in a very poor state and unfit for being used for any other purpose than as a farmhouse.

The property is described as having three bedrooms (all without any electricity supply) and a kitchen, dining and sitting rooms and a bathroom downstairs.

The tribunal effectively determined that the property was not of the standard of a domestic residence and therefore was of the character appropriate to the small acreage of land concerned.

As it is made clear in the evidence, the Department for Environment, Food and Rural Affairs confirmed in 2009 that there were at that time over 100,000 holdings in England that had an acreage of less than 12.5 acres.

Such small holdings are very common in rural areas and it is surprising that it was held that the activities undertaken in this case amounted to farming.

Therefore, this case does encourage the prospect of further claims for agricultural property relief on such properties but must be interpreted in the context of its own specific circumstances.

What to look out for

Finally, the Autumn Statement has now been announced for 29 November. Expect further developments on these issues.