Not all the badges of trade need be satisfied by the activities of offering a property as a furnished holiday letting in order to have that use qualify as a business, which is a trading activity for the purposes of business property relief (BPR) for inheritance tax (IHT). However, they must be pursued with a view to making a profit. The useful case of Pawson identifies the practical issues involved in making a successful claim for BPR in relation to property used for furnished holiday letting purposes.

The Government announced in Budget 2011 that it wanted to support philanthropy, encourage charitable giving and reduce the administrative burden on charities. As part of that initiative the government wish to reduce the rate of Inheritance Tax (IHT) for those leaving 10% or more of their estate on death to charity – see http://bit.ly/kfjCV5

2011 ended with a flurry of developments which all contribute to keeping the tax adviser on their toes. Here are five things you need to know:

1.  What is ‘reasonable excuse’?

‘Reasonable excuse’ is not defined in statute but it has been the subject of several tax cases. The law does specify two situations that are not reasonable excuse:

Lay trustees often rely on tax and trust professionals to deal with the tax side of the trust’s affairs. However, the duty and responsibility to pay the tax by the due dates for payment rests with the trustees and it will not be a reasonable excuse to say that the trustees relied on professional advisers. However, the failure of the professional advisers to pay the tax on time will doubtless colour the trustees’ view as to whether they wish the said professional to handle the trust in future.

At present there is no full statutory definition of tax residence and the Government believes there is a strong case for introducing one for individuals. Most practitioners would heartily agree, given the definition largely rests on conflicting case law.

Tax residence is an essential pre-requisite for determining an individual’s tax liability so should be clear in order to be fair. To this end HMRC and HM Treasury issued a consultation document:

http://www.hm-treasury.gov.uk/consult_statutory_residence_test.htm

on 17 June 2011 in the hope that the responses will inform the draft legislation for the Finance Bill 2012. Comments are requested by 9 September 2011.

The claim for Agricultural Property Relief (APR) on the farmhouse occupied by Dennis Golding is an interesting case for those advising small farmers where through age and infirmity little agricultural activity is conducted at the farm and low profits might be seen as determinative of lack of commerciality.

The Government announced in Budget 2011 that it wanted to support philanthropy, encourage charitable giving and reduce the administrative burden on charities. As part of that initiative a consultation is under way which concerns the decision to reduce the rate of Inheritance Tax (IHT) for those leaving 10% or more of their estate on death to charity – see http://bit.ly/kfjCV5

Who would have thought that the current tax definition of an incapacitated person dates back to before 1918 and therefore uses terminology that most of us would now recognise as offensive such as ‘any infant, person of unsound mind, lunatic, idiot or insane person’.

To the government’s credit it was agreed as part of the Budget that the legislative terminology needed to be brought in line with the operational terminology which is both more appropriate and takes into account modern views on mental health conditions. Hence HMRC published a consultation document on 24 May 2011 – for a download see http://bit.ly/mjpqM4

Our work is never dull – the ground rules are always changing and we have to be nimble on our feet to avoid the potential to get stuck in the mud. Changes of Government particularly result in changes of emphasis or policy at the Treasury and therefore in the actions and behaviour at HMRC. Here I plan to provide the practitioner with a round-up of current developments in tax as they affect the Wills, Probate and Trust practitioner.

The purpose of the Excepted Estates process is to reduce the number of probate cases where a full Inheritance Tax (IHT) account (the IHT 400) has to be used. If the IHT 400 is not needed it reduces the amount of work required in the administration of the deceased’s estate. However, the IHT 205 form, which is considerably shorter, has to be submitted to the Probate Registry instead.

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2011, SI2011/214 came into force on 1 March 2011. They bring into effect some tidying up of the rules but in essence their main purpose is to accommodate the transferable nil rate band.

The Disclosure of Tax Avoidance Schemes (DOTAS) system was introduced for certain taxes in 2006. Inheritance Tax (IHT) was not included at the start. The objectives of the disclosure rules are to obtain:

• Early information about tax arrangements and how they work; and
• Information about who has used them

which clearly gives HMRC the opportunity to consider their impact and where appropriate to put forward legislation to close a particular scheme down.

With effect from 6 April 2011 schemes which seek to avoid IHT charges associated with the transfer of property into trust come within the disclosure rules. Do you know which matters are affected? Do you know what you are supposed to do?

In many cases where one spouse decides to set up or buy a company through which to earn a living, tax advice has meant that it is usual to involve the other spouse as an owner of some shares. The dividend income can then be split favourably between them to avoid one spouse paying unnecessary higher rates of income tax by being the sole recipient of any dividend income.

HMRC tried to apply the settlement code to such situations and despite their failure in the Arctic Systems case have recently tried again in the case of Patmore v HMRC [2010] UKFTT 334 [2010] WTLR 125.

The awkward case of RSPCA v Sharp reached the Court of Appeal on 21 December 2010. It was an appeal by the RSPCA against the judgment of Peter Smith upon the interpretation of a testator’s Will. The interpretation of the Will had been challenged by the RSPCA as residuary beneficiary and caused much debate. He found against the charity and was most critical of their approach to the matter. The Court of Appeal unanimously disagreed with the trial judge and concluded the RSPCA should succeed.

Happy 2011 to you all! After the festive fizz now the new year slumber but hopefully not slump. 2010 was something of a transitional year with a change in government and the beginning of a slight improvement in the economy but 2011 is the beginning of the Coalition’s economic deep freeze which will start in earnest to-day with the increase in VAT to 20%.

As the historians say you cannot understand the present without understanding the past I thought it was timely to review some of the ‘highlights’ of 2010.

Who would have guessed that the Office of Tax Simplification (OTS) set up by the Government in July 2010 to remove reliefs which:

• Were largely historic,
• Were not frequently used;
• Create distortions in the tax system; or
• Are used by a number of taxpayers but that are complex for business and/or HMRC to administer

would be advocating the removal of some core reliefs which Wills, Probate and Trusts practitioners might have regarded as sacrosanct.

HM Revenue and Customs (HMRC) have published 3 further toolkits to help agents avoid common errors when completing clients’ returns.

The toolkits are downloadable from http://www.hmrc.gov.uk/agents/prereturn-support-agents.htm, and cover:

• VAT Input Tax
• Inheritance Tax
• Expenses and benefits from employment

A lovely sunny morning; it’s Friday and thoughts turn to the weekend, drinks with friends; time with the family and generally achieving some work/life balance. I turn to the task of reading a number of consultation documents which affect the private client practitioner and notice the sunny morning has slipped into a rather grey and miserly afternoon; perhaps it is the thought of all those consultations!

Disclosure of IHT avoidance

To see the consultation document you need to download a copy from http://bit.ly/cE6B2O

This will mean that we have to .......

Should a lay trustee whose co-trustee was the Executor and Trust Company of a solicitor’s firm be entitled to argue that he had a reasonable excuse for the late payment of capital gains tax (CGT) on a share sale because HMRC had not drawn the payment on account feature to his attention?

The Emergency Budget produced a modest 45 Budget notes to kick-start the Chancellor’s five year plan to rebuild the British economy. Somewhere in the mix are the 6 issues of interest to private client practitioners which are the subject of this summary.

The law relating to mistake and the rule in Hastings-Bass, where trustees exercise their powers in a misapprehension as to the effect of the exercise of those powers, have developed along different lines. This is another case in which the Court was asked to apply the rule to protect the beneficiaries where the trustees had exercised their powers incorrectly because the resulting tax consequences were not as they had anticipated.

Managing risk is one of the hot summer topics as we enter the season for professional indemnity insurance renewal. Identifying the risk is the first step to ensuring that risk is managed. In the complex world of tax it surely makes sense to employ tools provided by HMRC which address the many mistakes they see, the impact of which may result in penalties and loss of reputation.

Why not consider the relevant toolkit for you and see if it can provide guidance as part of your firm’s risk management of tax advice and compliance?

When considering the availability of Agricultural Property Relief (APR) for Inheritance Tax (IHT) we must remember the provisions of s.117 IHTA 1984. The property must have been either:

• Occupied by the transferor for the purposes of agriculture throughout the period of 2 years prior to the date of the transfer; or

• Owned by the transferor and occupied by him or someone else for the purposes of agriculture throughout the period of 7 years prior to the date of the transfer

Where a farmer through Illness or old age is not in occupation then it would seem that there is no actual relief. In practice HMRC will allow 3 months absence but there must be an intention to return and it must be possible to re-occupy the property. This little case provides some useful clarification where the senior partner in a farming partnership had moved into a care home but the ‘bungalow was still used to accommodate the diminishing needs of the senior partner’.

The recent case of Fryer v HMRC [2010] UK FTT 87 is a reminder that cases brought before the new First Tier Tax Tribunal are limited to matters within their statutory authority – namely, they are to consider the statutory provisions as they are and not as the parties to the proceedings might want them to be on the basis of fairness. It follows that where a person is found to fall within a statutory provision, it must be applied.

In this case, the provisions in question were s.3 IHTA 1984 (relating to what is a transfer of value) and s.10 IHTA 1984 (providing for dispositions not intended to confer a gratuitous benefit).

What should you advise a client to do? The Government has just announced in the Budget 2010 that the Nil Rate Band (NRB) is frozen at £325,000 until 2014/15. The Conservatives announced some time ago that they intend to raise the NRB threshold to £1 million whilst retaining the transferable NRB (TNRB). Even with the current budget deficit the Conservatives maintain they will adhere to this policy, it might just be delayed.

Meanwhile, we have the Government’s statistics for the amount of money in millions of pounds generated by the various taxes both direct and indirect which shows just how small a contribution to the fiscal pot IHT makes. For 2009/10 it represented 2,251 million which sounds a lot until you hear that Beer duties bring in 3,151 million and it is likely that there are more HMRC staff administering IHT than Beer duty!

If the government’s coffers are definitely half full and considerable public sector retrenchment is ahead whichever political party gains power after the election one does have to wonder why we continue with IHT when a mere 2% on income tax would bring in more at the current time or even 3.5% on VAT.

It is this political uncertainty which is surely keeping clients from undertaking tax planning at the current time coupled with their need to retain as much capital as possible to fund their future in a low interest world. How do we suggest clients should approach Will drafting and estate planning against this backdrop?

Mr Gaines-Cooper’s appeal against assessment to £30 million of back taxes was heard with two other appeals regarding the same issue; namely, the apparent change in HMRC’s interpretation of the law and their use of the IR20 leaflet.

Mr Gaines-Cooper and his co-appellants contended that HMRC had misapplied and misconstrued paragraphs 2.7-2.9 of IR20 which deals with “Leaving the UK permanently or indefinitely”.

Those paragraphs say:

Well it’s come and gone and we are none the wiser. The predictions that the Pre Budget Report on the 9 December 2009 would introduce draconian Capital Gains Tax (CGT) anti-avoidance rules in advance of an increase in the rate of CGT in the Budget in March did not happen; the abolition of Business Property Relief did not happen and where were the spending cuts? Certainly they were not announced in detail in the PBR.

Instead we got the following:

I was recently asked to advise a farmer on the prospect of retaining APR/BPR for IHT in the event of him agreeing to a Wind Turbine or two on his land. It certainly proved to be an interesting question - no answer, sadly, was to be found blowing in the wind on the Isle of Wight!

The Finance Bill received Royal Assent on 21 July 2009 and as a result the new s.6 and Schedule 2 to the Finance Act 2009 brings in the provisions for an additional rate of income tax and an additional rate for dividends. The consequential amendments include increases to the trust rate and the dividend trust rate. By aligning the trust rate and the dividend trust rate with the highest rates of personal taxation this means that the trust rate increases to 50% from 40% with effect from 6 April 2010 and the dividend trust rate increases from 32.5% to 42.5%.

For events on or after 1 April 2009 the liable person(s) may be charged penalties if they do not take reasonable care in preparing their IHT account or excepted estate return. Have you updated your practice and procedures to avoid penalties?

The so-called simplification of Will drafting by the introduction of the Transferable Nil Rate Band (TNRB) has complicated matters for some clients. Where the clients have been married (or been in a civil partnership) before particular care is required in assessing the use or transferability of the previous spouse/CP unused nil rate band. The Will drafter should focus on where any unused nil rate band may be wasted and whether the client appreciates the options open to him. For a simple checklist to consider in such circumstances please click below.

CHECKLIST - download pdf here

© Gill Steel, LawSkills Ltd. 2009

Are special tax reliefs for furnished holiday lettings likely to become a thing of the past from 6 April 2010 in the light of the release on Budget Day of HMRC’s technical note sounding the demise of the legislative code for income tax and CGT contained in Income Tax (Trading & Other Income) Act 2005?

HM Revenue & Customs (HMRC) are introducing a series of toolkits for agents to provide guidance on risk management (compliance from HMRC’s perspective), and to set out how agents can reduce the likelihood of mistakes occurring in returns.

HMRC believe that using the toolkits will help agents to ensure the completeness and accuracy of returns and thus reduce the potential risk of an HMRC enquiry or inspection.

In a Budget which has been criticised on all sides the Chancellor Alistair Darling has for once not taken the opportunity to alter much which affects the Wills, Probate and Trust practitioner who does not deal with offshore matters. The three headline items are:

• the significant increase in income tax rates on trusts with no interest in possession
• the expansion of the geographic area to which Agricultural Property Relief applies and
• the bringing of IHT into line with the new compliance regime

HMRC are replacing the IHT200 with IHT400 with effect from 9 June 2009 but the new form is already available on the HMRC website. The basic concept of the IHT account is unchanged – it will continue to constitute a core form with various schedules.