Shares and Capital Gains Tax - Identification

Capital gains tax has become considerably less complicated since 6 April 2008 than it was previously, given the new flat rate of tax at 18%.

Another element in the capital gains tax calculations specifically in relation to shares is the rules that govern share identification -- i.e. if you sell 500 out of a holding of 2,000 shares that were bought in tranches of 100 shares at different times for different prices, exactly which shares do you sell, and which are retained? (Note that if you hold your shares in an ISA or SIPP then the following doesn't apply, as any gains are free from capital gain tax.)

New basic rules

From 5 April 2008, the basic rules to determine which shares are sold are:

1) Shares bought and sold on the same day;

2) Shares acquired within the 30 days following the sale (on a first in, first out basis);

3) The "Section 104" holding (any other of the same type of shares held in any given company).

Steps (1) and (2) above were introduced to prevent the practice of 'bed and breakfasting', which was a common tax-planning technique employed to take advantage of the capital gains tax annual exempt amount (currently £10,100).

The idea was that a calculated number of shares would be sold, sufficient to generate a gain approximately equal to the annual exemption, and the exact same number of shares would be repurchased with the proceeds, at a cost comparable to the sale proceeds, thereby effectively earning a tax-free uplift in the cost of the shares held.

Although it is no longer possible to undertake this specific type of transaction, it is often good practice to utilise an annual exemption wherever possible and there are a number of similar ideas that may still be of use (such as selling shares outside of an ISA and then rebuying within an ISA).

Section 104 holding

The abolition of taper relief and indexation in April 2008 meant that the length of share ownership became no longer relevant for capital gains tax purposes. As a result, all shares of the same class in the same company that do not fall within (1) and (2) above are treated as a single asset, called the Section 104 holding.

The cost of any given share in a Section 104 holding is calculated with reference to the total amount paid for the overall holding divided by the number of shares held. For example, if 2,000 shares had been purchased in 500 share tranches, costing £500, £1,000, £1,500 and £2,000; the total cost of those 2,000 shares is £5,000, or £2.50 per share.

This means that, when calculating gains on the sale of shares, it is only necessary to know the total number of shares and total amount paid for them, even if a partial disposal is made -- if only 1000 shares are sold, the allowable cost for capital gains tax will be 50% of the total; if only 500 shares, 25%.

Shares acquired pre 6 April 2008

Well, on the face of it, the new system does seem relatively straightforward and will enable taxpayers to be more aware of their own tax liabilities and to manage their tax affairs accordingly. Anyone only now dipping their toe into the stock market waters will be able to maintain a clear picture of their capital gains tax position.

But what about those who purchased shares before the new rules took effect? Well, as ever in tax, that depends.

If shares have been acquired pre 6 April 2008, but none of those shares have been sold, these shares will pass into the Section 104 holding as a single asset, i.e. a total number of shares at a total cost/value.

If shares were held at 31 March 1982, they will pass at their March 1982 valuation; if shares have been inherited they will pass at probate value, and if shares have been received by way of gift they will pass at the market value at time of transfer, unless a holdover claim was made (more on these capital gains tax reliefs in a future article).

However, if shares were bought and sold prior to 6 April 2008, and shares were still held at that date, the situation becomes a little more complicated. Essentially, before the shares can transfer into the Section 104 holding at a global cost per share, that cost must be calculated with reference to the 'old' rules that applied to share disposals up to 5 April 2008.

The old rules

The order of precedence in determining which shares were sold used to be considerably more complicated, as follows:

1) Shares bought and sold on the same day

2) Shares acquired within the 30 days following the sale (on a first in, first out basis)

3) Shares acquired between 6 April 1998 and the 5 April 2008 (on a last in, first out basis)

4) Shares acquired between 1 April 1982 and 5 April 1998 (the old "Section 104" holding")

5) Shares acquired between 7 April 1965 and 31 March 1982 (the "1982 Holding")

6) Shares held prior to 6 April 1965, matched on a last in, first out basis.

HM Revenue and Customs would argue that this does not add an additional burden on the taxpayer, as anyone selling shares prior to 6 April 2008 would have had to prepare a computation under the old rules in order to correctly complete their tax return for the year of disposal.

Although this may be the case for many people, for earlier tax years where the proceeds of share sales were less than twice the annual exempt amount, and total gains were less than this same amount, no figures or computations needed to be included on a tax return. This means that it is likely to be the smaller investor who is hardest hit by the extra level of computation required on the sale of such shares.

Shares and Capital Gains Tax

The rules regarding shares and capital gains tax have given many investors a serious headache.

CGT is a tax on assets.It specifically does not apply to cash, provided it is in £ sterling. You can dispose of any amount of cash to anyone without any capital gains tax implications, although inheritance tax could be a different story. If they can't get you one way…death and taxes!

One of the most common assets chargeable to CGT is company shares, but the sweeping changes from 6 April 2008 had a big effect on the way gains are now calculated for many shareholders.

The way things were

Before this date, shares qualified for indexation allowance and taper relief, both of which relied on length of ownership.

Indexation was introduced on 31 March 1982 and shares held since this date benefited from more than 100% allowance, effectively doubling the original cost or rebased value. Shares held at 31 March 1982 were 'rebased' at that date, meaning that the shares were given an attributed cost equal to the current market value, effectively wiping out any earlier gain. The March 1982 value is often, but not always, higher than original cost, but if cost generates a lower gain, this value can be used instead.

Many people felt that a rebasing exercise should have taken place in March 1998, when indexation allowance, a reflection of inflation, was frozen or in March 2008 when it was scrapped, along with taper relief. The last rebasing prior to 1982 was in 1965, 17 years earlier, so it could be argued that this is already ten years late.

The current rules

CGT has now become less complicated, although in many cases, more expensive than previously. 

Gains are calculated on a proceeds less cost basis and a flat rate of tax at 18% is then applied to sums exceeding the annual exempt amount, which is £10,100 per person for the 2009/10 tax year.

Incidental costs of acquisition and sale also reduce the amount of the gain. Costs such as stamp duty reserve tax, broker's fees and commissions may all be deducted when computing a gain. Exchange rate translations if purchasing shares or securities in currencies other than sterling could increase, reduce or even create a gain, as gains on currency are chargeable to CGT in a way £ sterling is not.

If you only dispose of part of your holding then there are various rules to decide which shares you have sold for tax purposes. 

Entrepreneurs' Relief

Many shareholdings that would have qualified for business asset taper relief will not qualify for entrepreneurs' relief. A holding of quoted shares will only qualify if 5% is owned (although again, AIM shares are treated as unquoted) and the shareholder is an officer or employee of the company in question. There is also a minimum holding period of one year.

Gifts

Of course, you may decide to give your long-suffering children some parts of your share portfolio. Here you would be making a disposal without receiving any proceeds. It would be nice to think this would generate a capital loss equal to the cost of the shares, in this type of situation the market value at the date of disposal is substituted for the lack of proceeds. This means that the generous parent could be faced with a capital gain even though they received no cash for the shares with which to pay the tax bill.

There is a relief available for gifts of business assets which effectively transfers the gain arising to the new owner of the shares, to be paid when they eventually sell the shares. However, quoted company shares, which does not include shares listed on AIM, will not qualify as business assets, and a 5% holding in unquoted shares is required, thus parents so inclined may be better off selling their shares to a third party and then gifting the cash proceeds net of any tax due to their children.

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Negligible Value Claims

Of course, all this talk of capital gains could be quite grating for those who have the misfortune to be in possession of shareholdings that are, possible literally, not worth the paper they are printed on.

Where a share becomes worth 'next to nothing' it is possible to make a claim for the shares to be considered of negligible value. If the claim is accepted, it is possible to generate a capital loss equal to the original cost incurred on the acquisition of the shares. HM Revenue and Customs also publish a list of quoted companies they consider to be of negligible value.

Overall, CGT is simpler than it was, but there are still tricks and turns to think about when considering transactions in shares.

Overseas holiday letting losses

Under new HMRC Guidelines you may be able to claim these losses against other income often leading to a tax refund.

The requirements are:

• The Property must be situated in the European Economic Area but not the UK.
• Let and Furnished but not empty
• Available for letting for at least 140 days per year.
• Actually let for at least 60 days in the year.
• Not normally occupied by one tenant for more than 31 days for at least 7 months of the year.

Time Restrictions:

HMRC have indicated that the cut off date to claim these losses for earlier years is the 31st July 2009.

Business rates deferral scheme: Q&A for rate payers

The Government is allowing business rate payers to defer payment of 60% of the increase in their 2009-10 rates bills until 2010-11 and 2011-12. This is meant to give you the flexibility to manage your rates bill in the current economic climate.

What do I need to do now, to defer the increase in my rates bill?

Your billing authority will write to you offering you the option to defer payment of 60% of the increase once the necessary to regulations have been put in place.

Can I start paying the reduced amount now?

By now, your billing authority should have written to you, the rate payer, offering you the option to defer payment of 60% of the increase.Until that time, you must keep paying your legally established liability as set out on your current bill.

Most of the increase in my bill is due to the end of transitional relief rather than Retail Prices Index (RPI) inflation. Can I defer 60% of that increase too?

Yes.

How do I claim this help?

When your billing authority writes to you, you just need to let them know that you would like to defer payment of 60% of the increase.

Do local authorities have to allow me to defer payment?
Yes. Deferral will be available on request from the rate payer.

Will I have to defer payment?

No. You will have the option of deferral to help you manage your bills, but it will be up to you whether you take up that option.

How long can I defer for?

The deferred liability will be repaid over two years. You will pay 50% of the deferred amount in 2010-11 and the other 50% in 2011-12.

How much will the average business benefit?

A business paying a rates bill on a fairly typical property seeing a £600 rise in its 2009/10 rates liability would be able to defer £360 of that increase to future years.

Will businesses be allowed to defer in future years?

The Government has no plans to allow businesses to defer their 2010/11 liability. However, the position will be kept under review.

I have already paid my annual business rates. Can I have a refund?

No. Deferral is only available in respect of rates that have not already been paid.


How will this be administered?

Local billing authorities are responsible for billing and collection, and will therefore be responsible for administering any deferral and adding the deferred amounts to 2010/11 and 2011/12 bills.

What is the legislation behind this?

The Government has brought forward regulations under the Local Government Finance Act 1988.

Will this mean that local authorities will receive less grant?

No. Central Government will ensure that grant allocations remain unaffected by this help.

Will this just place extra costs on local authorities?

No. Any new costs for local authorities will be considered a new burden and will be funded by central Government, using the same mechanism as for the recent mailshot to business rate payers about the 2010 revaluation.

Will this apply in the devolved administrations?

That is a matter for the devolved administrations.

Will local authorities have to fund the difference by supplementing the rates pool or reduced funding from Central Government?

No. Any new costs for local government associated with this change will be funded by central Government. The change will not affect local authority formula grant allocations and local authorities will be able to reflect the new arrangements in their contributions to the pool.

Tax Chamber Decision In “Laerstate” - A Cautionary Tale of Failure to Maintain Non-UK Tax Residence

A recent decision of the Tax Chamber of the UK's new First-Tier Tribunal, Laerstate BV v Commissioners for HMRC, reminds us that  maintaining non-UK corporate residence requires careful management, particularly when influential personnel are active in the UK.

The case looked at the residence of a Netherlands incorporated company ("Laerstate")under the old UK Netherlands Tax Treaty and found it to have been UK resident as a result of:

•  a director exercising his powers of central management and control of Laerstate from within the UK, and 
•  for a period following that director's resignation from his office, his continued exercise of that central management and control from within the UK in usurpation of the remaining director's powers.

For a time,Laerstate had two directors - one who remained outside the UK and had no economic interest in the company (Trapman), and the other who frequently visited the UK and who owned all the company's equity and debt (Bock).


Effectively it was a personal holding company for Bock's interest in Lonrho, a UK company of which he became CEO, and its key strategic decisions related to the acquisition and disposal of those shares.


The evidence reported in the decision shows an effort by Laerstate's representative at the hearing to establish that its central management and control was exercised at board meetings held outside the UK, such that it was non-UK resident.


Evidence was provided that:

• various director's resolutions had been executed outside the UK,
• meetings of the two directors had been held outside the UK,
• documents had been executed on behalf of the company outside the UK.

However, the evidence was  somewhat patchy nature and insufficient to persuade the Tribunal that central management and control of Laerstate was exercised at board meetings. As a result, the conduct of the directors (who had the relevant powers) outside those meetings became crucial, and HMRC were able show Bock had operated as the company's decision maker whilst in the UK.


HMRC's arguments that the company was UK resident, through UK central management and control, were assisted by evidence that:

• there was an interval of 18 months in which no board meetings had been held;
• many of the offshore board meetings did not involve strategic decision making;
• the chronology suggested that key decisions had been taken when Bock was in the UK and without formal board meetings having been held;
• professional advisers were instructed by, and corresponded with, Bock, and not with Trapman;
• Bock conducted negotiations whilst in the UK in a manner that suggested that he made decisions for the company;
• Trapman was often without even "the absolute minimum information" necessary to make the relevant decisions at the time they were made; and
• after Bock resigned as a director Trapman was simply acting as directed by Bock, not acting independently after considering suggestions Bock made. 

The Tribunal concluded that, for the period in question, central management and control was exercised in the UK and the place of effective management (POEM), for the purposes of the residence tie-breaker in the treaty, was also in the UK.


The case is a useful reminder that where non-UK residence of a company is desired:

• board meetings should be held regularly outside the UK, and strategic decision making should be reserved for, and occur only at, those meetings;
• the board members should be provided with sufficient information to enable the meeting to make all necessary decisions;
• evidence of the information provided, and of deliberation of the issues at the meeting, should be created and retained. Contemporaneous rather than pre-prepared board minutes are preferable; and
• directors and other influential personnel must conduct their activities in relation to the company in a manner consistent with these principles, especially when in the UK.

 On the central management and control issue the Tribunal found that, unlike in Wood v Holden, the company was not managed through its board meetings and that in fact control was exercised by the sole shareholder alone, substantially whilst in the UK. 

On the effective management issue, the tribunal followed the Special Commissioner's reasoning in Smallwood v HMRC and there is little here  adding to proper analysis of the POEM.

The case does, however, serve as a good reminder of the issues to consider on company residence where there is one very dominant individual as was the situation here.

Although not points relevant to this decision, it is also worth noting that it is strongly advisable for all or at least a majority of directors to be non-UK resident, and for non-UK resident directors to have appropriate expertise. Participation in meetings by telephone from within the UK should be avoided, and physical attendance at the offshore meeting should be the normal procedure.


Where relevant personnel operate in the UK, a company's affairs must be very carefully managed if UK tax residence is not desired. The story told in the decision is one of commercial pressures over-riding the careful corporate governance practices required.

Stamp Duty Land Tax - Some Pitfalls

As the name implies, SDLT is charged on land transactions, and the rate of tax (payable by the purchaser) depends on the amount paid for the property:

Stamp Duty Land Tax rates and thresholds

Stamp Duty Land Tax (SDLT) is charged on land and property transactions in the UK. It is charged at different rates and has different thresholds for different types of property and different values of transaction.

The tax rate and payment threshold varies according to whether the property is in residential or non-residential use, and whether it is a freehold or leasehold. SDLT relief is available for certain kinds of property or transaction.


SDLT and Stamp Duty rates up to September 2008


SDLT rates for residential property


The table below applies for all freehold residential purchases and transfers and the premium paid for a new lease or the assignment of an existing lease. (If the property will be used for both residential and non-residential purposes the rates differ - please see the section 'SDLT for non-residential or mixed use property'.)

New thresholds from September 2008


The £175,000 threshold shown in the table applies from 3 September 2008 until 31 December 2009 inclusive (unless the lease is for less than 21 years - see the later section on this). The new threshold means that Disadvantaged Areas Relief, previously available for properties in areas designated as 'disadvantaged', doesn't apply during this period.

New leases


If the transaction involves the purchase of a new lease with a substantial rent there may be an additional SDLT charge to that shown below, based on the rent. See the next section and the table 'SDLT on rent for new leasehold properties (residential)' for more detail.

Residential land or property SDLT rates and thresholds

Purchase price/lease premium or transfer value	SDLT rate
Up to £175,000 (until 31 December 2009 - see note above)	Zero
Over £175,000 to £250,000	1%
Over £250,000 to £500,000	3%
Over £500,000	4%

If the value is above the payment threshold, SDLT is charged at the appropriate rate on the whole of the amount paid. For example, a house bought for £180,000 is charged at 1 per cent on £180,000, so £1,800 must be paid in SDLT. A house bought for £350,000 is charged at 3 per cent, so SDLT of £10,500 is payable.

Special rules for residential leases of less than 21 years


The temporary SDLT threshold of £175,000 for residential property transactions does not apply to:

• the assignment of an existing lease which has less than 21 years to run
• the grant of a lease for a term of less than 21 years

In these cases the normal thresholds of £125,000 (£150,000 if the property is situated in a disadvantaged area) apply.

Properties bought in a disadvantaged area


Disadvantaged Areas Relief (whereby residential properties bought in areas designated by the government as 'disadvantaged' had a higher SDLT threshold of £150,000) will not apply for residential only property purchases between 3 September 2008 and 31 December 2009 . Instead the SDLT threshold will be the same as for all other residential property. The only exception is where the lease is for less than 21 years - as described earlier.

Some property transactions in a disadvantaged area may have both residential and non-residential parts - eg a shop with a flat above. In this case the temporary £175,000 threshold between 3 September 2008 and 31 December 2009 does not apply. For SDLT purposes, the property value is apportioned on a fair and reasonable basis between the two uses. If the amount attributed to the residential element does not exceed £150,000 then Disadvantaged Areas Relief will apply to that element and a separate £150,000 threshold applies to the non-residential element.

SDLT on rent - new residential leasehold purchase

When a new residential lease has a substantial annual rent, SDLT is payable on both of the following, which are calculated separately and then added together:

• the lease premium (purchase price) - see the table above
• the 'net present value' (NPV) of the rent payable

The NPV is based on the value of the total rent over the life of the lease and can be worked out using HMRC's online calculator .

In practice SDLT only becomes payable on a fairly high rent - starting at around £4,500 a year for a 99-year lease, for example, however the exact threshold depends on the length of the lease.

Net present value of rent - residential	SDLT rate
£0 - £175,000	Zero
Over £175,000	1% of the value that exceeds £125,000

If the NPV exceeds £175,000 tax is due at 1% on the excess over the normal £125,000 threshold not the new temporary level of £175,000

For example, if the NPV of the rent on a new residential lease totals £200,000, then the SDLT on this rent is 1% of £75,000, or £750. This charge is then added to the SDLT charged on the premium paid for the new lease, shown in the previous table.

Different rates apply for mixed use purchases - see the later section on this.

If six or more residential properties form part of a single transaction


If six or more properties form part of a single transaction the rules, rates and thresholds for non-residential properties apply. The amounts paid for all the properties in the transaction must be added together in order to establish the rate of tax payable.

SDLT rates for non-residential or mixed use properties


Non-residential property includes:

• commercial property such as shops or offices
• agricultural land
• forests
• any other land or property which is not used as a dwelling
• six or more residential properties bought in a single transaction

A mixed use property is one that incorporates both residential and non-residential elements.

The table below applies for freehold and leasehold non-residential and mixed use purchases and transfers,

If the transaction involves the purchase of a new lease with a substantial annual rent, there may be additional SDLT charge to that shown below, based on the rent. See the later section and table for more detail.

Non-residential land or property rates and thresholds

Purchase price/lease premium or transfer value (non-residential or mixed use)	SDLT rate
Up to £150,000 - annual rent is under £1,000	Zero
Up to £150,000 - annual rent is £1,000 or more	1%
Over £150,000 to £250,000	1%
Over £250,000 to £500,000	3%
Over £500,000	4%

Note that for the above purpose the annual rent is the highest annual rent known to be payable in any year of the lease, not the net present value used to determine any tax payable on the rent as described below.

SDLT on rent - new non-residential or mixed use leasehold purchase


When a new non-residential or mixed use lease has a substantial annual rent, SDLT is payable on both of the following which are calculated separately and then added together:

• the lease premium or purchase price - see the table above
• the net present value of the rent payable (this is based on the value of the total rent over the life of the lease and can be worked out using HMRC's online calculators)

Generally, SDLT presents few problems, but there are some odd quirks to watch out for:

Transfers to a company


When land is transferred to a company, even if it is transferred for no payment, SDLT is charged on the market value of the land, in either of the following situations:

• The person transferring the land is “connected” with the company, or
• The company issues shares to the transferor in exchange for the land

Mortgages


Where a property is mortgaged, if it (or a share in it) is gifted to another person, they are deemed to take over their share of the mortgage, and that is “valuable consideration” for SDLT purposes. For example, if Mr A owns a buy to let property worth £400,000, on which there is a mortgage of £300,000, and he gives a half share in the property to his wife, there is no CGT to pay because gifts between spouses are free of CGT, but his wife will have to pay SDLT. Having taken over half the mortgage (£150,000), she is deemed to have “paid” that for her half share in the house, and SDLT at 1% (£1,500) is due.

Linked transactions


This is a typical piece of anti-avoidance legislation, in that it is designed to attack one form of abuse, but has the side effect of producing unfair results.

First, the abuse. If I want to buy a house costing £300,000, the SDLT will be £9,000 (at the 3% rate). But what if the vendor sells me the house for £250,000 (SDLT at 1% of £2,500), and sells the garden to my wife for £50,000 (no SDLT as it is below the threshold of £125,000)?

Unfortunately, because these two transactions are “linked” – they are part of the same bargain and the two purchasers are “connected” with each other – the rule says you must add the consideration for each transaction together, and then everyone must pay SDLT at the rate for the total – so in this case I pay £7,500 (3%) and my wife pays £1,500 (also at 3%).

That is fair enough, as the splitting of the sale was merely a trick to avoid SDLT, but consider this case:

Jack and Jill each own a flat, and by coincidence their flats are each worth exactly the same - £200,000. Jack’s flat is in Manchester, and Jill’s in Birmingham. They have never met, but they work for the same large organisation. One day, Jack gets transferred to Birmingham, and Jill gets a transfer to Manchester. They advertise their flats in the company magazine, and eventually agree to do a straight swap. For SDLT purposes, the “consideration” in each case is the value of the house swapped, so they each pay SDLT of £2,000 (the 1% rate).

If the facts were exactly the same, except that Jack was married to Jill’s sister, Jack and Jill would be “connected” and so the two transactions would be “linked”. This in turn means that the total consideration for the two transactions must be used to decide the rate of SDLT. The total is £400,000, which is in the 3% band, so Jack and Jill each have to pay SDLT of £6,000 (£200,000 at 3%).

HMRC NDO notification form could be used maliciously.

I am somewhat dismayed by the disclosure form for email notification of a desire to take advantage of the New Disclosure Opportunity - found here .


(On looking at HMRC's site, I discover they have taken down the offending page)

What's wrong with it?


 It appears to be a perfectly innocuous form.

But it is lacking in several important security features.

• It asks neither for the taxpayer's reference number or national insurance number. 
• It does not ask for a valid email address which could be verified,
• It does not employ any captcha technology to verify that it is being completed by a human being and not a bot.
• The underlying javascript code (which I have examined) does not check the details entered against a database - merely checking that data exists in the required fields but not the validity of the data entered.

Why does this matter?

As it stands the form could be used by a grudge bearer or malicious individual to make false notification of a desire to take advantage of the New Disclosure Opportunity. This could well involve their hapless, innocent target in a long and fruitless inquiry by HMRC into a non-existent off-shore account.

HMRC needs to be more proffessional in the design of their forms and not produce shoddy, ill-considered rubbish such as this.

PAYE - New Computer system - Codes going wrong

Bug in new PAYE system will cause underpaid tax

The new PAYE service was launched earlier this summer with apparently very few problems.

Unfortunately, it now seems that there is a problem with some PAYE codes being issued by the new system. Some items included in PAYE codes under the old system, have not been carried forward to the new system. This has mainly affected state pensions and underpayments from a previous year which were being collected through the PAYE code but also include:

• not including married couples allowance unless the database has a date of marriage;
• agents’ copies being sent to previous agents;
• records wrongly amended to show taxpayer has died; and
• inability to reinstate omitted underpayment for previous year.

Omitting these items means taxpayers will pay too little tax.

This will only create a problem if a revised code has been issued since the new system was launched. Otherwise the employer will just continue with the same code as before. A new code will however be generated after a Form P11D has been processed where that showed changes in the values of benefits in kind.

HMRC  is investigating the problem. Meanwhile, if you have any similar examples of omissions from code numbers:

•  email the  details to me;
•  with your permission to reveal to your name to HMRC ;
•  your National Insurance Number and ;
• the PAYE reference number (per the coding notice).

I will pass specific details to HMRC to help them trace the cause of the problem.

HMRC deductions in your PAYE code

This article explains the most common entries on a PAYE Coding Notice.

Common ‘Allowance and relief’ entries

Personal Allowance

This is the amount of taxable income that you can receive tax-free in the current tax year.

Blind Person’s Allowance

This is a flat rate tax-free allowance which you can claim if you’re certified blind and are on a local authority register of blind persons, or if you live in Scotland or Northern Ireland and are unable to perform any work for which eyesight is essential. If you’re entitled to it, it should show on your Coding Notice after the Personal Allowance.

Married Couple’s Allowance

Married Couple’s Allowance (where you or your spouse or civil partner were born on or before 5 April 1935) is an allowance that reduces your tax if you’re a taxpayer. The note on your Coding Notice will tell you what Married Couple’s Allowance is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.

Maintenance Payments relief

As with Married Couple’s Allowance, Maintenance Payments relief (where you or your spouse or civil partner were born on or before 5 April 1935) is an allowance that reduces your tax if you’re a taxpayer.

 The note on your Coding Notice will tell you what Maintenance Payments relief is worth to you in terms of a tax reduction and how your tax code number has been adjusted upwards to give you the correct relief.

Other allowances and reliefs

Other entries on your PAYE Coding Notice might include:

• professional subscriptions
• flat rate job expenses (for work tools or specialist clothing)
• other job expenses
• payments towards a retirement annuity
• double taxation relief
• foreign pension allowance
• higher rate tax relief on gift aid payments
• higher rate tax relief on pensions you’re paying into
• loss relief
• loan interest
• balance of tax allowances (from another job or pension)

Depending on the type of entry, the effect of adding these amounts to the income you can receive tax-free is one of the following:

• you’re not taxed on the income you use to make those payments
• you won’t pay tax on some or all of that income
• you’ll get tax relief associated with a payment

Items that can reduce your tax-free amount

The negative entries showing on the PAYE Coding Notice take account of amounts of taxable income that HM Revenue & Customs (HMRC) believes you’ve already received or will be receiving this tax year without tax taken off. They may also include taxable company benefits or tax owed from a previous year.

The amounts HMRC deducts ensure you pay the right amount of tax on these items.

They might include:

Reduction to collect unpaid tax

If you owe tax from a previous year, the easiest way for HMRC to collect this (if it’s under £2,000) is to reduce your tax-free allowances by the amount of income on which the outstanding tax is owed. This enables them to collect the correct amount of owed tax through PAYE (Pay As You Earn) each week or month. (If you owe more than £2,000 they will send you a tax bill.)

‘Adjustment’ to 20 per cent rate band

You will see this if you have two or more jobs or company pensions at the same time and you pay tax at basic rate (20 per cent) on each – but the level of your income taken together means that you have to pay some tax at the higher rate band of 40 per cent. To collect the additional tax (and make sure you don’t end up owing tax at the end of the year) HMRC reduces your tax-free amount for your main job or pension by an amount that has the effect of collecting the additional tax you owe.

State Pension

The State Pension is taxable income, but paid to you by the Department of Work and Pensions without tax taken off. To make sure you pay tax on it, HMRC deducts its annual value from your tax-free allowances.

Other taxable state benefits

If you’re receiving taxable state benefits, HMRC deducts their annual value from your tax-free allowances to make sure you pay tax on them. For example, Incapacity Benefit paid after the first 28 weeks is taxable but you receive it without tax taken off.

Taxable company benefits (car, van, fuel, medical insurance etc).

The value of these sorts of benefits (provided by your employer) is taxable so they need to be deducted from your allowances and reliefs.

Gift Aid adjustment

You may see this if you made Gift Aid donations but hadn’t paid enough tax to cover the amount the charity will reclaim. The deduction from your tax-free income will make up the difference.

Income from annuity

If you’re receiving taxable annuity payments without tax taken off, HMRC deducts the annual value from your tax-free allowances to make sure you pay tax on this income.

Property income

Any rental income (less allowable expenses) not covered by the Rent a Room scheme is taxable, but you receive it without tax taken off so it needs to appear here.

Interest without tax taken off

An estimate of untaxed interest HMRC expects you to receive will show here to make sure you pay tax on this income.

Savings income taxable at 40 per cent

Savings income is taxed at 20 per cent before you get it and dividends (income from shares) at 10 per cent. If you’re a higher rate taxpayer you will owe the difference between 20 per cent and 40 per cent on savings income, and between 10 per cent and 32.5 per cent on dividend income. The amount shown on your Coding Notice has the effect of collecting the difference.

Other pensions/earnings/commission not taxed when you receive them

HMRC’s estimate of other untaxed pension/earnings you receive will appear on your Coding Notice. By deducting the value of these from your allowances they will collect the estimated tax due on that pension or other income. If at the end of the tax year it turns out that the amount you received is greater than estimated they will ask you to pay tax on the difference.

Other deductions

The above list isn’t exhaustive, but covers some of the most common items that reduce your tax-free amount entries. However, the principle applied is the same for all – the amount shown is deducted from your tax allowances and this has the effect of collecting the right amount of tax owed for that item,

UK Holding companies for multinational groups

A radical change in United Kingdom (UK) corporation tax may make the it an  attractive location for tax-efficient structuring within a multinational group.


With effect from 1 July 2009, foreign (as well as UK) source dividends are exempt from UK corporation tax.


Alongside the benign treatment outbound dividends receive and the exemption for gains realized on disposals of trading subsidiaries, this makes the UK tax neutral for many international investments. When combined with other tax and legal benefits, the United Kingdom becomes a competitive jurisdiction for certain international holding and joint venture structures.

Tax-Efficient Dividend Flows

Dividends Received

From 1 July 2009, most dividends received in the United Kingdom are free of UK corporation tax.


A number of "classes" of dividend payment are now tax exempt, provided the dividend payment is not tax deductible in the source jurisdiction (and certain specific anti-avoidance exclusions do not apply). The most relevant classes of exempt dividend, none of which have a minimum holding period, are:

• Dividends paid on shares of any kind where the UK recipient controls (or jointly controls) the payer, in terms of powers or economic rights;

• Dividends paid on non-redeemable ordinary shares – there is no minimum shareholding size;

• Dividends paid on shares of any kind where the recipient (together with connected persons) holdsless than 10 per cent of the issued share capital of the paying company (or less than 10 per cent of the class of shares held, where there is more than one class in issue); and

• Dividends paid on shares of any kind where the profits are not derived from transactions designed to achieve a reduction in United Kingdom tax.

The introduction of this dividend exemption has been widely welcomed as a replacement for the complex regime formerly in place – the foreign tax credit rules. 


The credit rules have not been removed entirely, and remain in place as the default regime,  applying where dividends are not exempt. The credit rules render foreign dividends liable to UK tax (currently, at 28 per cent), but with credit for foreign tax – subject to conditions, both withholding tax and local tax on the profits out of which the dividend is paid. The rules will often give complete relief from UK tax on dividend receipts, but are relatively complicated and administratively burdensome.


Importantly, it is possible for a UK dividend recipient to elect out of exemption treatment so that the credit rules will apply – and there are circumstances where this may be beneficial. 


For instance, a number of the United Kingdom's tax treaties (including, for example, those with Germany, Israel and Russia) only reduce withholding tax on dividends paid from those jurisdictions, if the dividend is subject to tax in the United Kingdom. Where dividends are to be received from these treaty jurisdictions, and where it is necessary to rely on the treaty for withholding tax reduction (rather than, for instance, intra-EU exemption), the credit rules may give a better overall outcome than dividend exemption.


Reduced Withholding Tax on Dividends from Foreign Jurisdictions


UK companies can receive dividends from foreign subsidiaries free of local withholding tax if those subsidiaries are located within the European Union, in accordance with the EU Parent/Subsidiary Directive.


For subsidiaries outside the EU, withholding tax on dividends can be reduced, often to nil, by the United Kingdom's excellent tax treaty network. The relative advantages need to be assessed on a case-bycase basis, depending on the detailed provisions of the relevant treaties. But, in terms of the sheer size and range of its treaty network, with around 112 active tax treaties, the United Kingdom compares favourably with other well-known holding company jurisdictions, including (for instance) the Netherlands, Luxembourg, Cyprus, Singapore, Mauritius, Ireland, Malta and Switzerland.


No UK Withholding Tax on Outbound Dividends


The United Kingdom does not levy withholding tax on dividends, or liquidation distributions, paid by UK companies.


This combination of extensive relief from foreign withholding tax, exemption from UK tax on dividend receipts, and the absence of UK withholding tax on outbound dividends, means that it is possible for distributions of profits from operating subsidiaries in many foreign jurisdictions to flow through the United Kingdom with no, or minimal, incremental tax cost.

Controlled Foreign Company Regime

Unlike the participation exemptions offered by some other jurisdictions, the exempt dividend classes cover dividends from low taxed/passive subsidiaries.


However, instead, the UK "controlled foreign company" (CFC) regime may tax a 25 per cent plus UK corporate shareholder on the undistributed income profits of a foreign company, which is taxed at less than three-fourths of the equivalent UK tax charge and which lacks genuine local substance or whose business is "passive" and/or largely conducted with affiliates.


So, depending on the nature of the group's activities, the UK CFC regime in its existing form may mean that the United Kingdom is more suitable as a location for an intermediate holding/JV company, owning operating subsidiaries, rather than an ultimate parent company.


However, a consultation process is currently underway that may result in a fundamental reform of the CFC regime. The stated aim is to ensure that the CFC regime does not catch profits genuinely earned overseas, but still protect the UK tax base from erosion by the artificial diversion of profits abroad. This is in the context of a general move, already evidenced by the introduction of the tax exemption for foreign dividends, towards a more territorial system for taxing foreign subsidiaries. A consultation document is expected to be published towards the end of 2009 with a view to any resulting reform coming into force in 2011.


The hope is that the outcome of the CFC consultation process will further enhance the competitiveness of the UK tax system.

No United Kingdom Tax on the Sale of Operating Subsidiaries

The so-called "substantial shareholding exemption" provides a tax exemption corresponding to the capital gains tax component of the "participation exemption" in some other jurisdictions.


Where a UK company sells a trading subsidiary, it will not normally be subject to any UK corporation tax on the realised gain, provided the UK company has owned at least 10 per cent of the ordinary shares of the trading subsidiary for at least 12 months and is itself either a trading company or a member of a trading group (and will remain so immediately following the disposal).

Deductible Interest Costs

Interest costs on borrowings incurred to purchase or fund (both UK and overseas) subsidiaries are, in principle, tax deductible (subject to certain anti-avoidance rules).


The level of debt taken on, and the interest rate payable, will need to meet arm's length standards.


It will also be necessary to consider whether the worldwide debt cap could impact upon the deduction of debt financing costs.


The worldwide debt cap is a new measure which will come into effect from 1 January 2010. 


Put simply, this rule can apply where a group puts a greater amount of debt into the UK than it has borrowed externally. Interest costs on the excess are not tax deductible. However, the regime is subject to gateway and de minimis tests, and contains important exemptions – including, in particular, for treasury companies and certain companies in the financial services sector.

No United Kingdom Tax on the Sale of Shares in a UK Company by a Foreign Shareholder

The United Kingdom does not tax any capital gain realised on a sale of shares in a UK holding company by a non-resident shareholder (unless the shares are assets of a UK permanent establishment).

Other Advantages

• In addition to the UK's extremely wide tax treaty network, the UK has entered into well over 100 bilateral investment treaties. These exist to give fair and equitable treatment to foreign investors in the counterparty state, protecting, in particular, against expropriation (without compensation) of business assets in that state.

• The tax treatment described here is based on the general UK corporation tax regime applicable to all companies, whatever their ownership or activities, and whether the subsidiaries are located in the UK or abroad, and hence may be less vulnerable to attack from anti-avoidance rules in other countries compared with a special holding company regime.

• English company law and contract law is robust and flexible, and company formation procedures in the United Kingdom are simple, fast and cheap.

• There is no capital duty payable on share capital subscriptions and no minimum capital requirement; however, sales of UK company shares do incur stamp duty at 0.5 per cent of the sale price.

• London provides excellent access to the international financial and capital markets.

• The UK, especially London, remains an attractive work base for many executives, for reasons of language, lifestyle, transport links and the (still) favourable tax treatment of resident but non-domiciled individuals.

Conclusion

It is worth considering the United Kingdom alongside other potential jurisdictions for structuring inbound/outbound investments in many cross-border situations.