Category: Indirect Tax

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Number Of Retail Investors Seeking IHT Advice Set To Rise

Advisers highlight expected increased use of flexible IHT solutions for clients

More than three out of four (78%) financial advisers expect the number of retail investors seeking help for IHT planning to increase over the next three years, according to new research from TIME Investments, which specialises in tax efficient investment solutions.  The findings come as IHT receipts hit a record £5.2 billion in 2017-18 despite the introduction of an additional nil-rate band.

Six out of ten (63%) advisers also predict an increase in the number of IHT products and investment solutions to be launched in the UK.  However, whilst this will offer more choice to investors, it also comes with a health warning – 88% of advisers questioned are concerned that new products will be launched by firms that don’t have the appropriate track record and/or expertise.

Two thirds of advisers predict an increase in the use of Business Relief (formerly known as Business Property Relief) over the next three years to help people reduce their IHT liabilities.  To encourage investors to support UK businesses, the Government allows shares held in qualifying companies that are not listed on any stock exchange and some of those listed on AIM to qualify for Business Relief. This means that once owned for two years, the shares no longer count towards the taxable part of an inheritable estate and are free from inheritance tax at point of death.

The accessibility of Business Relief investments and the range of investment opportunities available help to provide flexibility in IHT planning.  Three quarters of advisers felt that the increasing use of Power of Attorney due to rising dementia rates would contribute to the growth in the use of these flexible IHT solutions.

Henny Dovland, TIME Investments’ IHT expert comments: “The number of families in the UK being caught in the IHT net is increasing.  This represents a significant opportunity for advisers specialising in IHT and intergenerational planning and is reflected in our findings that reveal more specialist products are set to be launched in this market. However, care needs to be taken to ensure any new solutions are fit for purpose.  Our specialist team has a track record of over 22 years in this complex area.”

For further information on TIME Investments and its range of products, please visit www.time-investments.com

crypto tax
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Understanding your tax obligations in the crypto world

Understanding your tax obligations in the crypto world

By Arianne King, managing partner at London based commercial law firm, Al Bawardi Critchlow

With Bitcoin’s value slipping and reports suggesting that Q1 of 2018 was the worst quarter in its history, it seems the recent wild run on the crypto-scene has come to an end. Yet, digital currencies continue to attract the interest of the governments, investors, commentators and fintech innovators alike.

The reason for this is two-fold. On one hand, the technology that underpins cryptocurrencies – blockchain – holds disruptive potential likened to that of the internet itself. With its transparent, permanent and immutable record keeping, the potential of the technology to secure transactions between multiple parties is hard to argue with.

On the other hand, regulators are increasingly ramping up efforts to establish the legal status of e-money as the technology matures. It is clear that traditional financial institutions and lawmakers plan to get more involved in addressing this and the current lack of regulatory oversight in the UK today.

Mark Carney, Governor of the Bank of England, and others have consistently called for the crypto asset ecosystem to be held to the same standards as the rest of the financial system – and there have been some signs of progress here. Earlier this month, for example, one of the world’s top cryptocurrency exchanges, Coinbase, was granted a licence to operate by the UK’s Financial Conduct Authority (FCA), confirming it had been assessed and met certain anti-money laundering and processing standards, deeming it suitable to acquire a regulated status in the UK.

That said, the way in which cryptocurrency is taxed is fast becoming a burning issue. This is especially the case for current and prospective investors.

 

Understanding your obligations

Worryingly, many investors may not even be aware that they owe tax on their cryptocurrencies today. As in nearly every other aspect of tax, different countries and jurisdictions will have varying guidelines for declaring tax and equally different approaches to tackling evasion. As such, depending on where you are domiciled for tax, you may be breaking the law – or about to.

In the US, tax authorities view the likes of Bitcoin, Ripple and other cryptocurrencies as a form of property, rather than a true currency, and so it may be subject to capital gains tax. Taxpayers are therefore required to declare all cryptocurrency transactions in their annual tax returns, with the applicable tax applied to each deal. Meanwhile, in Germany, Bitcoin is classified like stocks and shares – capital gains tax is applied to profits made within the first year of ownership. After this point, their transaction will fall within the scope of a non-taxable ‘private sale’, exempting them from further taxation.

When it comes to enforcement, however, the US Inland Revenue Service (IRS) takes a much more active role monitoring virtual currencies and managing the infrastructure that enables trading than its European counterparts to date. In February of this year, for example, it assembled a dedicated team of investigators to counter tax evasion in the cryptocurrency industry. It argues that Bitcoin, and others like it, can be used in the same fashion as foreign bank accounts to facilitate tax dodging. It recently compelled Coinbase to send data on 13,000 of its users as part of an investigation of this kind – a move we may see from HMRC here in the UK in the future.

 

Tax in the UK

In Britain, the guidance provided by HMRC about cryptocurrencies is limited to a policy paper from March 2014. That said, while an official framework for cryptocurrency related tax remains forthcoming in the UK, the Treasury’s current regime may still mean that some individual investors are falling foul of compliance with the law as it stands.

Overall, the Revenue looks at the personal circumstances of an individual to inform a decision on whether tax is paid on crypto gains or not. The individual must prove whether they are a hobbyist or a professional investor and they will be taxed accordingly.

First of all, HMRC treats hobbyist traders in the same way that it treats those involved in other speculative activities, like gambling: they are currently exempt from paying tax on gains. This approach is fortunate in that it recognises the inherent volatility of the bitcoin market and means that a personal investor would not be hit with a tax bill for gains subsequently lost because of coin values plummeting.

Alternatively, if HMRC considers that an individual or corporation involved has a professional interest in the industry, then taxes would be payable. This is assessed on a case by case basis so the resulting decision, in this respect, will often be difficult to predict. If liable, profit and loss activity must be reflected in accounts under normal Corporation Tax rules. This is applicable to those involved at all levels of the process – whether trading, mining or operating an exchange and providing supporting services.

 

Where to next?

As with all income and gains generating assets, a tax system for cryptocurrencies will surely emerge – such a system and associated measures would also go some way towards addressing concerns that virtual currencies are still being used to enable fraud, money laundering and finance illicit activities like cybercrime.
The advice is to fully research your situation by contacting HMRC, an accountant or a tax adviser and keeping a full record of any advice given. If it appears that the HMRC are likely to find that your gains are taxable, it would be wise to put aside any gains in a contingency account to cover any tax that might fall due. Despite the decentralised nature of cryptocurrencies and the associated hype about this, they are taxable as financial assets by law in many countries. Ultimately, even in the crypto world, the old adage of  death and taxes still applies.

 

Don’t Lose your Business just Because You’ve lost your Marriage
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Don’t Lose your Business just Because You’ve lost your Marriage

Sadly divorce affects many of us, perhaps because of the difficulties balancing the extraordinary demands of growing a business with those of maintaining a thriving family relationship. The press has recently been awash with stories of business owners paying millions to their ex.

Thankfully, a number of avenues are available to an entrepreneur to mitigate the financial effects of divorce.

The first and most obvious is to get a prenup. That takes it out of the courts as much as possible and determines what’s going to happen to the assets in the unfortunate event of a marriage breakdown. If you’re already married you can get a postnup, and create a clear and plan in the best of times, to prepare yourself for the worst of times. Since Vardags’ success in 2010 in the Supreme Court in the “Radmacher” case, pre- and post-nups are generally upheld.

The second thing is to look at what you brought into the marriage because that is typically excluded from the 50/50 division. Perhaps your company was still a start-up at that stage, but it may have had considerable latent value that should be taken into account.

“My company’s going to be worth a billion in a few years”. Great for investors and staff, and great for inspiring oneself through the inevitable tough times building a business. But a disaster during a divorce! You need to remove the rose-tinted glasses and ask a few key questions:

What would someone really pay to buy shares owned by you, the key person in the business? Generally far less than an investor would pay to purchase new shares to help grow your business.

What rights do investors have over your business that restrict the value of your shares? Often quite a few: preference shares, consents or vetos, drag-along provisions, etc.

If the business were sold and a “professional manager” put in place to manage the business what would that do to the profits and hence the value? Certainly there would be the direct extra costs of that individual and perhaps some indirect ones too.

What risks are there? Past performance is not necessarily a guide to the future.

Asking such questions and getting a realistic value for one’s business can sometimes go a long way to mitigate the effects of divorce. I’ve been involved in cases where using arguments such as the above have reduced the “headline” valuation of shares in a business by 90% or more; there is almost always something that can be done.

Judges tend to be quite unimaginative in what they will ultimately order as a settlement if your case is determined by the Court (not to mention the enormous cost of going through a fully-contested divorce process). Much better to try to negotiate a settlement. Perhaps you can find a way in which your spouse can retain a stake in the business and be aligned with your interests (both upside and downside); perhaps you could structure a payout over several years; perhaps you could raise money within the business; perhaps you can set up trusts to protect the long-term value for your children. By far the best settlements I’ve seen have been negotiated, creatively and early-on in the process before the parties establish entrenched positions.

When your life’s work is at stake, the temptation to try and hide your wealth from the courts can be intense. The most common tactics business owners use are: hiding it offshore and/or in trusts, putting shareholdings into the name of relatives, friends or business associates, creating dubious debts (to parents, to the company, to friends), “hiding behind” the corporate veil and creating a web of companies. Recently I’ve recently witnessed more obscure attempts to hide wealth, for example by investing in hard-to-track Bitcoins.

In consequence, divorce law has become a highly sophisticated corporate and financial discipline as lawyers and experts try to crack their way through to the truth – in a complex game of hide and seek. There is no doubt that some people “get away with it”, but many others certainly don’t and the Courts can take a pretty dim view of people trying to deny their spouse access to their wealth. It’s a game of poker and we would never advise a client to play it.

As an entrepreneur or business owner, if you’re involved in divorce proceedings, you really should get early professional advice. The worst cases I’ve worked on have been picking up the pieces of a DIY-job. If you head off in the wrong direction and you’ve got somebody on the other side who is absolutely determined to hunt you down, it can be incredibly time-consuming, horribly expensive and ultimately you may well get caught out. One should be quite proactive about financial disclosure: be upfront about it, present your wealth in a realistic – as opposed to optimistic – way and let that be challenged by the other side.

Of course, there is another option for people when faced with divorce. I’ve seen a number of incredibly successful entrepreneurs take the attitude of ‘I’m just going to give them half of it. I then want to move on with my life and just go and earn it again’. It’s an alternative: rather than fight it, just go with it and then make yourself successful again. It saves the time and misery of going through a costly and acrimonious divorce, something which can be incredibly distracting when you’re trying to make money.

Dr Stephen Bence is Founder and Chairman of fast-growing business information company Beauhurst and Director of Strategy and divorce finance expert at top family law firm, Vardags.

BPR Offers Renewable Investors Timely Solution for IHT Mitigation
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BPR Offers Renewable Investors Timely Solution for IHT Mitigation

While EIS schemes with renewable energy investments will no longer qualify for government-backed incentives from 5th April, investors can still benefit from both the incentive schemes and achieve Inheritance Tax exemption with Business Property Relief (BPR) qualifying assets, according to Intelligent Partnership (IP), the UK’s leading provider of education and insights on alternative investments.

According to a study conducted by IP for its new EIS report*, renewables have been the most popular EIS investment over the last three years, with the majority (58%) of advisers selecting this as their preferred investment sector.
IP’s research also found that, since 1998, 28% of all EIS investment offers have been in energy – 60 products in total. In its analysis of fundraising targets by sector, energy had the largest average across the market of £14.67m – almost £6m higher than the next sector average (technology).

Speaking at IP’s EIS Masterclass in March, **Henny Dovland of TIME Investments said: “Conservative investors have favoured these large-scale, asset-backed investments with well-developed technologies underpinned by government incentives because they are predictable and therefore low risk.

“They no longer qualify under EIS but the subsidies – both Feed-in Tariffs and Renewable Obligation Certificates – haven’t disappeared. For BPR they continue to be great predictable long-term revenue producing assets.”
According to IP, many EIS investors will now have financial planning needs around mitigating the inheritance tax that their estates will be liable for.

Daniel Kiernan, Research Director at Intelligent Partnerships said: “With rising asset prices and the nil rate band frozen, HMRC estimates that 5,000 additional estates will be pulled into the IHT net by 2018. The baby boomer generation are estimated to control 80% of private wealth in the UK and, as they head into their 60s, they are now thinking about how they can pass that wealth onto their beneficiaries.

“Holding assets that qualify for Business Property Relief is one way to reduce the IHT bill, and by virtue of their EIS investments, they will already have held BPR qualifying assets for the two year qualifying period required for IHT exemption. Advisers should bear this in mind. There is a three year window to purchase replacement BPR assets, so as their clients exit Renewable Energy EIS investments, there is an opportunity to reinvest in the sector and still benefit from the incentives via a BPR product. For clients who are reaching the point where IHT is a consideration, it would be a shame to let the qualification lapse and have to restart the clock.”

According to IP, if a renewable energy investment was suitable for a client within an EIS, it will be a suitable investment within a BPR product – and as such it will help clients start to take steps to mitigate their estate’s IHT bill.

Daniel Kiernan continued: “A major benefit is that, unlike other estate planning solutions, if the client requires access to the funds in the future the investment can be liquidated and the funds freed up for other purposes – so clients are not forced to make irreversible decisions or lock money up for overly long periods. An investment into a BPR product could be a way of retaining the qualification for the relief without having to commit funds indefinitely.”

99p Downloads Hit by VAT Change
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99p Downloads Hit by VAT Change

 

Changes to how VAT is taxed may mean digital stores like iTunes and Google will no longer be able to offer 99p music downloads.

New legislation, announced as part of the recent budget, requires online retailers to put VAT on media downloads based on a customer’s location.

Both Apple and Amazon have, until now been able to place lower VAT on downloads, due to their headquarters being based in Luxembourg. However the new scheme would instead be based on the location of the consumer, meaning buyers in the UK would pay 20% as opposed to Luxembourg’s 15%.

It is still not clear whether any increases would be passed onto consumers or taken on by publishers, however the end of the 99p download could have a huge impact on digital sales, which now account for over half of total sales figures in the UK.

The move comes as the Government attempts to get tougher on multinationals and forms part of ‘international efforts to develop tough, new global tax rules’, which forecasters suggest could generate an extra £300m in tax revenues during the first year.

A 2012 report revealed that the UK was losing out on more than £1.5bn in VAT every year on digital services, including music and video downloads.