ASK THE EXPERTS
Q. Does tax ‘loophole of the month’ still work? A previous ‘Loophole of the month’ (June 2008, Take a year out) suggested a way of extracting cash from a UK company’s reserves. So if you go abroad for a period as short as a single tax year, you can take out the company’s reserves by way of dividend in that tax year, providing you qualify as non-UK-resident, without any UK tax at all. HMRC have published HMRC6.pdf, which seems to remove this strategy after 6th April 2009:
Whereas Section 9.1.9 states:
If you are not resident in the UK, the normal rule is that you are not entitled to a tax credit when you receive a dividend from a UK company. You do not pay UK tax on any dividends from UK companies.
But Section 10.13 contradicts this:
10.13 Investment Income when you are not resident in the UK Although you are not resident in the UK you will still be liable to pay UK tax on investment income from UK sources. You will not be liable to pay UK tax on any investment income from sources outside the UK. The table at 10.15 shows UK tax liability you have on investment income.
Table 10.15 states:
Investment Income from a UK source is liable to tax on an Arising Basis for a UK domiciled but Non resident person.
Can you clarify which of these contradictory statements now applies to your ‘take a year out’ loophole, and if it is no longer viable are there any alternatives, e.g. via an EFRBS?
M. S., via email
A. We see what you mean. HMRC 6 is not particularly clear but we do not believe there has been any change in the law. Table 10.15 does not differentiate between different sorts of investment income and is a simplification. UK-source investment income is technically taxable on non-residents but only to the extent of the basic-rate tax if this has been deducted at source. So for dividends this is satisfied by the notional tax credit. Section 9 refers to dividends not carrying a tax credit probably because it means it is not a repayable ‘real’ tax credit.
So dividends are technically taxable but only at the basic rate, and this tax is covered by the notional tax credit, therefore if you were non-resident you could receive a dividend from a UK company and it would effectively be tax-free.
Q. I am trying to establish whether I might or might not be a ‘higher earner’ of over £150k under the new legislation. I make the following calculation. Is it right?
Gross salary
Plus the value of business benefits in kind (in my case company fuel)
Minus the value of business allowances (in my case use of private car on company business)
Plus gross savings’ interest
Plus gross dividends’ income
Minus the single person’s allowance
Minus gross (of 20%, not 40%, tax) contributions that I make to my SIPP (up to a maximum of £20,000)
Minus gross (of 20%, not 40%, tax) gift aid contributions.
There is no deduction at source from my salary for pension and my employer does not contribute to my pension. I presume that I can deduct the single person’s allowance for 2007/8 and 2008/9, but not for 2009/10 as my gross salary will mean that I lose the single person’s allowance. Does a non-taxable payment for compensation for early termination of an employment contract (up to £30k max) enter into the ‘gross salary’ number or not for the purposes of the above calculation?
M. G. P., via email
A. We agree with your calculations: the £150k is based on taxable income so would be computed as you suggest. In our view, a £30k non-taxable termination payment would not be included in the £150k, but it is a bit early days for the details of the legislation to be known yet.
Q. I appreciate for income tax purposes that a husband and wife ownership of a rental property will mean that the rental income/profits will have to be apportioned on a 50/50 basis but where a taxpayer is 40% income tax can you not own a rental property jointly with a limited company with an agreement that the limited company receives the lion’s share of any rental profit, taxable at 22%?
T. E., via email
A. Yes, you can, but the disadvantage comes when you sell the property. The company will pay tax at 22% on the gain, whereas you will only pay CGT at only 18%. Then you have to get the money out of the company at which point, depending on how you do it, you will suffer another tax charge. So the short-term savings may cost you more in the long term.
Q. I have a property I bought in the 1970s. For the last few years, it has been a holiday let and met the criteria. With the recent taxation changes, I am considering selling it. If I sell it before April 2010, how is the “Entrepreneurs” Capital Gains regime applied? Thank you.
C. R., via website
A. Properties that qualify as furnished holiday lettings are entitled to entrepreneurs’ relief. The gain will be computed by deducting the value of the property in March 1982 (ask the estate who you appoint to sell it to establish a 1982 value as well) from the net sale proceeds. You are then taxed at 18% on 5/9 of the gain, which equates to an effective rate of 10%.
Q. What can I claim (expenses/purchases/buy more freeholds etc) to offset against tax on the sale of the freehold of a block of flats owned by my investment company?
A.P., via email
A. Buying more freeholds will not count as a deductible expense. To be deductible the costs must either be directly related to the sale of the property in which case they will be allowable in computing the capital gain or they must be a revenue cost (i.e. annual and recurring) of running the company (so could include directors’ remuneration) in which case they will be management expenses which will be offsetable against total profits including capital gains.
Q. My client is a one-man Ltd Co and is involved in providing consultancy work.The Company has a contract with a client that will exceed 24 months. The contract was originally for less than 24 months but has been extended. There are no breaks in the period of the contract. The Director is engaged full-time on the contact.He is aware that his ability to reclaim travel expenses will be denied (guide no 490 travel expenses). The travel costs amount to approx £8,000 pa.Is there anyway to overcome the problem?
A.Y., via email
A. We think you have misunderstood the temporary workplace rules. A place is a temporary workplace if the posting is expected to last less than 24 months. Therefore for the period until the decision was taken to extend the contract beyond 24 months the travel expenses are deductible. So if for example the original plan was for the posting to be for 20 months and it was decided at the end of month 19 to extend it for a further period that took the whole posting to beyond 24 months then the expenses would not be taxable for the first 19 months but would become taxable after that.See employment income manual 32084