A trust is an obligation that binds a trustee, an individual or a company to deal with the assets such as land, money and shares which form part of the trust. The person who puts assets into a trust is known as a settlor, and the trust is for the benefit of one or more ‘beneficiaries’. The trustees make decisions regarding how the assets in a trust are to be managed, transferred or held back for the future use of the beneficiaries.
IHT planning can involve the careful use of trusts. There are a number of trusts which are subject to different tax rules. The main types are bare trusts, discretionary trusts, interest in possession trusts and mixed trusts.
One of the most widely used, and the name suggests the most basic kinds of trust are bare trust. These trusts are also known as simple trusts or naked trusts. Under a bare trust, each beneficiary has an immediate and absolute title to both capital and income. The beneficiary of basic trust is taxable on the trust income and gains.
HMRC’s guidance states that beneficiaries must include trust income and gains in any tax return they are required to complete or in any form R40. The trustees of a bare trust may pay the tax due to HMRC on behalf of a beneficiary, but the beneficiary is strictly chargeable to tax.
There are critical differences between bare and other types of trust beyond this article’s scope.
The UK’s Digital Services Tax (DST) began on 1 April 2020. This tax is designed to ensure that the major social media, search engines and online retailers are subject to a 2% tax on revenues generated from the participation of UK users of their services.
Businesses are liable to the DST when the group’s businesses worldwide revenues from the specified digital activities are more than £500 million, and more than £25 million of these revenues are derived from UK users. However, there is an allowance of £25 million, which means a group’s first £25 million of revenues derived from UK users will not be subject to Digital Services Tax.
The following three services are considered digital services activities for DST:
– a social media service, – an internet search engine; or – an online marketplace.
A group can make a voluntary election to calculate the liability to DST using an alternative basis of charge provision. The alternative basis of charge will benefit groups making a loss or operating at a low margin on their UK digital services activity.
There will be a review of DST by HM Treasury before the end of 2025, laid before Parliament.
The Chancellor, Rishi Sunak, has delivered his Spring Statement to the House of Commons against a backdrop of a growing cost of living crisis. The Chancellor also stressed that, apart from the untold human suffering, the Russian invasion of Ukraine is creating further uncertainty in the domestic and global economy, particularly in relation to energy markets and the food supply chain.
On the morning of the Spring Statement, the Office for National Statistics (ONS) announced that the rate of Consumer Price Index inflation increased to 6.2% in February putting further pressure on the Chancellor to act. The Office for Budget Responsibility (OBR) also expects average inflation to rise to 7.4% this year.
We have highlighted below the main tax measures that were announced:
National Insurance contributions (NICs)
The Chancellor did not remove the 1.25% increase in NICs due to come into effect from this April to help fund the NHS and Social Care. However, he did try to soften the blow by announcing a significant increase in the National Insurance Threshold from £9,880 to £12,570. This increase will see the alignment of the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs with the personal allowance of £12,570 from 6 July 2022. It has also been confirmed that the thresholds will remain aligned going forward. According to government figures, this means that around 70% of employees will pay fewer NICs, even accounting for the introduction of the Health and Social Care Levy.
The PT and LPL will be £9,880 (as previously announced) from 6 April 2022 – to 5 July 2022. It is unusual for tax rates to change during a tax year, but the Chancellor was facing pressure to make changes and the short period before the new tax year started left him with no choice but to delay the increase for 3 months. July is the earliest date that will allow all payroll software developers and employers to update their systems and implement the necessary changes. This means the LPL will be £11,908 for the 2022-23 tax year which is equivalent to 13 weeks of the threshold at £9,880 and 39 weeks at £12,570.
Reducing Class 2 NICs payments for low earners
From April 2022, the self-employed will see Class 2 NICs liabilities reduced to nil on profits between the Small Profits Threshold (SPT) and LPL. This will ensure that no one earning between the SPT and LPL will pay any Class 2 NICs, while allowing individuals to be able to continue to build up National Insurance credits. This change represents a tax cut for around 500,000 self-employed people worth up to £165 per year.
In his speech, the Chancellor confirmed that the government would increase the Employment Allowance by £1,000 to £5,000 from April 2022. This represents a tax boost for around 495,000 small businesses who can claim an increased reduction in their NIC liabilities or even reduce their bills to zero.
In total, this means that from April 2022, 670,000 businesses will not pay NICs and the Health and Social Care Levy due to the Employment Allowance. The Employment Allowance is only available to employers with employer NIC liabilities of under £100,000 in the previous tax year. Connected employers or those with multiple PAYE schemes will have their contributions aggregated to assess eligibility for the allowance.
Fuel duty cut
The Chancellor announced a temporary UK-wide 5p per litre cut in fuel duty on petrol and diesel from 6pm on 23 March 2022 for 12 months. This is a saving worth around £100 for the average car driver, £200 for the average van driver, and £1500 for the average haulier in the coming year. This represents total savings for households and businesses worth around £2.4 billion in 2022-23 and is only the second cut in fuel duty over the last 20 years.
The government will expand the scope of VAT relief available for energy-saving materials (ESMs) by reducing VAT from 5% to 0% from 1 April 2022 until 31 March 2027. This will ensure that households having energy-saving materials installed like solar panels, heat pumps, or insulation will pay no VAT.
The government will also include additional technologies and remove the complex eligibility conditions, reversing a Court of Justice of the European Union ruling that unnecessarily restricted the application of the relief. A typical family having roof top solar panels installed will save more than £1,000 in total on installation, and then £300 annually on their energy bills.
The VAT rate cannot immediately be reduced to 0% in Northern Ireland due to the Northern Ireland Protocol. However, the Northern Ireland Executive will receive a Barnett share of the value of the relief until it can be introduced UK-wide.
Household Support Fund
The government launched a £500 million package of support for vulnerable households in October 2021. The Household Support Fund is used to help support millions of vulnerable households in England and monies is distributed by councils. This means that local councils can use the funding to provide discretionary support to vulnerable households. This could include using small grants to meet daily needs such as food, clothing, and utilities.
The Chancellor announced as part of his Spring Statement measures that the government will provide an additional £500 million for the Household Support Fund from April 2022. The Barnett formula will apply in the usual way to additional funding for the devolved administrations.
R&D tax relief reform
It has been confirmed that from April 2023, all cloud computing costs associated with R&D, including storage, will qualify for relief. This change will boost sectors where the UK is a world-leader, including AI, robotics, manufacturing, and design. Further changes to the relief may also be announced as part of the Budget later this year.
Income Tax basic rate
Whilst no immediate changes were announced, the Chancellor confirmed that the government will reduce the basic rate of Income Tax to 19% from April 2024.
This will apply to the basic rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland and to the savings basic rate which applies to savings income for taxpayers across the UK.
The reduction in the basic rate for non-savings-non-dividend income will not apply for Scottish taxpayers because the power to set these rates is devolved to the Scottish Government. However, the Scottish government will receive additional funding which they can use as they see fit, including on reducing Income Tax or other taxes, or increased spending.
A reminder that the temporary extension to the eligible carry-back period for trading losses applies to company accounting periods ending between 1 April 2020 and 31 March 2022 and tax years 2020-21 and 2021-22 for unincorporated businesses. This extended loss relief allows trading losses to be carried back for three years (rather than one).
The extended relief was introduced to help businesses that suffered increased losses due to the coronavirus pandemic. Carrying back a trading loss may allow firms to generate tax repayments from an earlier profit-making period.
The extension to the relief applies to both incorporated and unincorporated businesses and is subject to a £2,000,000 cap. The £2,000,000 maximum applies separately to unused trading losses made by incorporated companies, after carry-back to the preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and a separate maximum of £2,000,000 for periods ending between 1 April 2021 and 31 March 2022.
The £2,000,000 for companies is subject to a group cap for each relevant period. Extended loss carry-back claims must usually be made part of a company tax return. However, it may cause more minor claims below a de minimis limit of £200,000 without waiting to submit a company tax return.
Stamp Duty Land Tax (SDLT) is a tax that is generally payable on the purchase or transfer of land and property in England and Northern Ireland. It is also expected in respect of certain lease premiums. You may also need to pay SDLT when all or part of an interest in land or property is transferred to you, and you give anything of monetary value in exchange.
Consider essential issues if you transfer land or property between unmarried couples and other joint owners. HMRC’s guidance on the subject states as follows:
You do not pay SDLT if two or more people jointly own property (as joint tenants or tenants in common), and you divide it physically and equally and own each part separately. But, if one person takes a more significant share or all of the other’s claims and pays cash or some further consideration in exchange, you must tell HMRC. If you pay more than the current threshold, you will pay SDLT.
Joint owners (including unmarried couples who are splitting up) may agree that one of them will take over ownership of a property they bought together, including any outstanding mortgage.
In this case, the person taking ownership will pay SDLT on the total chargeable consideration of the following (either or both) if it exceeds the SDLT threshold:
– any cash payment that one of the couple makes to the other for their share – the proportion of the outstanding mortgage that belongs to the share of the property being transferred
An employee can benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the employee’s interest and the commercial rate the employee would have to pay on loan obtained elsewhere. These types of loans are referred to as beneficial loans.
There are several scenarios where beneficial loans are exempt, and employers might not have to report anything to HMRC or pay tax and National Insurance. The most common exemption relates to small loans with a combined outstanding value to an employee of less than £10,000 throughout the tax year.
The list also includes loans provided:
– in the ordinary course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee) – to an employee for a fixed and invariable period, and at a fixed and invariable rate that was equal to or higher than HMRC’s official interest rate when took out the loan – under identical terms and conditions to the general public as well (this mainly applies to commercial lenders) – that are ‘qualifying loans’, meaning all of the interest qualifies for tax relief – using a director’s loan account as long as it’s not overdrawn during the tax year.
Special VAT rules allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.
The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main advantage is that the person making the option to tax will recover VAT on costs (subject to the usual rules) associated with the property, including the purchase and refurbishment of the property.
However, any subsequent sale or rental of the property will attract VAT. The purchaser or tenant can recover the VAT charged, which is not usually an issue. However, where the purchaser/tenant is not VAT registered or not fully taxable (such as a bank), the VAT can become an additional (non-recoverable) cost.
Once a tax option has been made, it can only be revoked under limited circumstances, so proper consideration of the issue is essential. This includes:
– within a specified ‘cooling off’ period in the first six months, – an automatic revocation where no interest has been held for more than six years, and – after 20 years has elapsed.
When a couple separates or divorces, it is unlikely to think about any tax implications. However, apart from the emotional stress, tax issues can also have a significant impact.
For example, when a couple is together, there is no Capital Gains Tax (CGT) payable on assets gifted or sold to a spouse or civil partner. However, if a couple separates and does not live together for an entire tax year or get divorced, CGT may be payable on assets transferred between the ex-partners.
This effectively means that the optimum time for a couple to separate would be at the start of the tax year so that they would have up to a year to plan how to transfer their assets tax efficiently. Obviously, in the real world, most couples will have far more on their minds than deciding to get separated on a particular day, but they should consider these issues.
It is also essential to make a financial agreement agreeable to both parties. If no agreement can be reached, going to court to make a ‘financial order’ will usually be required. The couple and their advisers should also give proper thought to what will happen to the family home, any family businesses, and Inheritance Tax implications.
Stamp Duty Land Tax (SDLT) is a tax that is generally payable on the purchase or transfer of land and property in England, and Northern Ireland. Wales and Scotland set their own Stamp Duty taxes. It is also payable in respect of certain lease premiums. You may also need to pay SDLT when all or part of an interest in land or property is transferred to you and you give anything of monetary value in exchange.
There are important issues to be aware of if you transfer land or property to a company. HMRC’s guidance on the subject states as follows:
When property is transferred to a company, SDLT may be payable on its market value, not a consideration. So, for example, if a property has a market value of £200,000 but the company only pays a consideration of £100,000, SDLT will still be payable on £200,000.
This applies in either of the following situations, the:
– person who transfers the property is ‘connected’ with the company – the definition of a connected person covers relatives and people who have some involvement with the company, – company pays for the property with shares in the company (partly or wholly) to the person making the transfer, where that person is connected to the company (but not necessarily the acquiring company).
Holding properties within a limited company can have many advantages such as lower Corporation Tax rates and tax relief on interest payments. However, it is important to be aware of issues that can arise including the payment of SDLT or regional equivalents.
If you are considering transferring property to a company, please take professional advice before completing the transaction.
We want to remind our readers that the increases in National Insurance Contributions (NIC) of 1.25% – first announced last year – will take effect from April 2022. These increases will be ring-fenced to provide funding for the NHS, health and social care.
The increases will apply to:
– Class 1 contributions (paid by employees) above the primary and secondary thresholds. This is the NIC that is deducted from your earnings by your employer. – Secondary Class 1 (paid by employers). Employer’s NIC contributions are paid as part of the regular PAYE/NIC payments unless covered by the present £4,000 employment allowance. – Class 4 (paid by self-employed). These contributions are added to your annual Self-Assessment statement. Employers should ensure that they are prepared for the increase as these changes will increase wage costs from April 2022.
All existing NICs reliefs to support employers will continue to apply. In addition to the employment allowance, this includes the following:
– employees under the age of 21 – apprentices under the age of 25 – qualifying Freeport employees – armed forces veterans
From April 2023, these increases will be incorporated into a new Levy. The Levy will be administered by HMRC and collected by the current channels for NICs – Pay As You Earn and Income Tax Self-Assessment.
Please note that there was significant political pressure in parliament to cancel this increase at the time this article was written. Therefore, we will advise if this challenge results in the withdrawal of the 1.25% increase.