The Most Hated Tax of All: Part 2

People often say: “I can’t understand why the solicitor is taking so long to deal with Grandma’s Will” There is another side to this

No matter how good you or your solicitor or accountant are at doing the forms, the Inheritance Tax process is frustrating. Your competence doesn’t matter a row of beans if the Tax Office drag their heels. You can be subject to an all too familiar round of delays caused by human error, computer failure or staff shortages. HMRC currently “believe” that the time line should be along the following lines.

Weeks 1 and 2 – IHT Claim Kick Off

Once an IHT400 inheritance tax account has been received by HMRC, the inheritance tax probate summary (IHT421) will be issued within 10 working days. This will allow personal representatives to apply for the grant of representation, preventing additional delays in this procedure. HMRC cannot do this until all inheritance tax on non-instalment property and any tax on instalment property that is due when the return is submitted is paid. We say that if payment of Inheritance Tax is made more than six months following the month end of death, HMRC will charge interest but in many cases, making payment this soon simply isn’t practical.

Weeks 3 and 4 – With HRMC

After payment HMRC will complete a number of administrative tasks in preparation for the initial review of the return by the risk team.

Weeks 5 to 11 – The Inheritance Estate Review

During these weeks the return will be reviewed. The complexity of the estate can impact the length of time that it takes for the return to be reviewed.

Weeks 12 to 20 – Compliance, or Not?

HMRC will now aim to inform the personal representative or his adviser whether the inheritance tax account has been selected for a compliance check. They will name the office carrying out the checks, and possibly the name of the compliance caseworker to contact with questions. We say the quality of the caseworker will have a big impact on how smoothly things go from that point on.  The caseworker is expected to make contact with the personal representative within 8 weeks of the initial letter. HMRC will confirm the accuracy of any property or other valuations that have been provided in the return and may also involve other agencies like the Valuation Office Agency or Shares and Assets Valuation or the Actuary. A letter together with a calculation of any additional inheritance tax due will be sent within 20 weeks of receipt of the tax return once the valuations have been agreed with the VOA or SAV. If the valuations cannot be agreed the issue of this letter may take longer. In all other circumstances the case will be sent to the service case working teams who will aim to finalise the tax position and prepare the case for closure within 20 weeks of the receipt of the return. We ask, “will this happen?” This is anyone’s guess and we have encountered, as with all things HMRC, a mixed bag. Provided the Executors or their representatives respond efficiently, it may be possible to achieve. But this presupposes that everything down at HMRC goes just as planned, and the caseworker is efficient. If things aren’t going according to plan, don’t assume the problem is with your solicitor or accountant. It could well be down to the tax man.

It’s the tax we don’t talk about – and the most hated tax of all!

A lot of people have heard of inheritance tax but it’s one of those things that you’ll not think about if you don’t have much wealth. Even if you do, we don’t like to talk about it “seriously”, in the main. The tax free amount is currently £325,000 and in many cases no tax will be due. But increasingly, families are finding they will have to pay inheritance tax when a loved one passes away. Often this is due to the rising value of property. This especially happens if the deceased person was single or widowed and the property is mortgage free. If the property was the only thing left it may be necessary to sell the property to pay the tax. There are ways to mitigate or even eliminate inheritance tax, depending upon the net value of what you own and what you want to do with your wealth. Some of the options are radical and not for the faint hearted.

Where to Start? Where There’s a Will, There’s a Way

A good starting point is having a Will that really reflects what you want. Without sounding morbid, we actually think it’s important to have a Will as soon as you have your own immediate family, so that if the worse should happen, they will not have the added uncertainty on top of losing a father or mother. We come across people even in their sixties seventies and even eighties who have not made a Will. The other dimension to this is that often, people don’t realise how flexible a Will can be, especially where “family politics” are involved. Arguably the second most important aspect that affects Inheritance Tax is a thing called “Joint Tenancy”. This is where, in layman’s terms, more than one person has a complete interest in an asset. A good example is a joint bank account. What people don’t often understand is that a joint tenancy is only disregarded if the other person is your spouse. If you apply this principle to say two single people that jointly own a property, the implications for tax can be serious. The person who has died is often treated as holding half of the value for tax purposes but sometimes the proportion can be higher. Once a family have realised that there is a tax bill, the next question usually is “when will it all be over?” Families want to remember their loved one but equally they want to move on and dealing with HM Revenue and Customs on this can be stressful even if a solicitor or accountant is engaged to help.

The Time-Consuming Wind Up Process

In our experience, Executors and Beneficiaries have an optimistic expectation of how long it will take to wind up an Estate. The key to that process is getting Probate, this can’t occur until the tax bill has been agreed with the Tax Man. The latest “timetable” for this was published this year by HMRC, setting out what people might expect and in “Part Two” we will set this out in detail.  

Keep Calm and Carry On Contracting? But, are you a Personal Service Company?

“IR 35” was the 1999 Inland Revenue pamphlet that explained to companies they could be liable for paying a kind of payroll tax. This was for any “one-man” or “one-woman” Director business providing personal services to a main business contractor, through their own Personal Service Company (PSC). After 18 years, most people still know it and refer to it as “IR35”. It’s a bit like the good old “Radio Times” except the latter is much more entertaining. IR 35 still does apply, but HMRC haven’t had anything near the success with it that was hoped for. This is mainly due to muddled thinking and an ignorance of complex and unpredictable leading tax cases on employment status.

A Change is Coming

In April 2017, HMRC introduced changes to “off payroll working” in the public sector, which removed the decision process from the individual operating through their PSC and stipulated that the public sector body must decide about the engagement. Those bodies affected included the NHS, BBC and MOD to name but a few. The decision all public sector bodies had to make when they engaged a PSC was whether there was a quasi-master/servant relationship. In other words, if you took out the PSC, was it the same as paying an employee for doing the job? That’s an oversimplification but you get the point. If there was this situation, or in many cases the merest whiff of it, the public body will operate a kind of payroll tax when it pays the PSC.

A New Approach Has the Potential For New Headaches

We were also handed a new concept of the ‘fee-payer’, which is the body which pays the PSC. Where the engagement was with the public sector body direct, that body would be liable for any incorrect status decisions. But, if there were agencies in the chain, that agency immediately above the PSC in the chain becomes responsible. The fact that agencies did not want to get caught out, and public bodies likewise, has been the major reason why from April 2017 to February 2018, around £500 million in revenue collections has been estimated as thanks to “off-payroll working” rules. PSCs in the public sector also suffered the removal of the flat rate 5% deduction from the PSCs income for general expenses incurred in the running of the PSCs business. If you were a PSC supplying only public sector customers, then all of your income would be accounted for as either tax/NICs or net pay. Your overheads suddenly became a tax loss without a home. Because of this (in the main) , many PSC’s closed down and their owners became umbrella employees or left to service the private sector.

New PSC Rules Are Coming, It’s Time to Plan

Perhaps due in no small part to the impending impact of Brexit, the Government has decided that the rules will come into that same private sector,. This will not be until April 2020 and then only for so called “large and medium” Contractors. Smaller Contractors that engage PSC’s will not be affected by the 2020 change. The 2018 Autumn Budget Brief also clarified that the reform will not be retrospective and “HMRC will focus its efforts on ensuring businesses comply with the reform rather than focus on historic cases”.  It says further that HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. This will follow the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years. This has to be a good thing. It will incentivise businesses to comply. HMRC should not be penalising soft targets that comply voluntarily. There is to be “further consultation on the detailed operation of the reform” to be published in the coming months, which will “inform the Draft Finance Bill legislation expected to be published in Summer 2019”. This is good news for small businesses that are Contractors of PSC’s. The estimate is that they number about 1.5 million. But, here’s the important thing – if you own a PSC and you service medium or large Contractors (i.e. not end users) , the writing seems to be on the wall, for a bit of a showdown some time in 2020. From that date, those Contractors may be obliged to tax your PSC income under a type of PAYE approach. Regardless of industry type, who are your company Contractors and how big are they? Could you shift your client base over the next year or two? This may be the price to pay for some PSC’s that want to endure. We can help you navigate this change, just call the team on 023 8061 4404 or send us an email.

Not really news…. but maybe “News to you”

In this occasional series, we look at things that you might not know but knowing could save you (or someone you know) some money. As suggested in our previous article on separation, we take a deeper look at couples and divorce.

Couples and Divorce – Part One

When a married couple divorce rather than just temporary separation, they need to take advice at the start. We continue the (almost true) story of Barbara (or Barbie as her friends call her) and Kenneth (aka Ken). To remind you, Barbie owned a flat, just three doors down from their house that they bought when they got married , and Ken moved in to that flat on 5th April 2018. In late April 2019 Barbie met a new gentleman. His name was Ryan – we forgot to mention that last time. And, Ken met a new lady. He would not say who but did say that Barbie knew her. We forget to mention that, too. Towards the end of 2019 they decided, having been married up to now, that “it wasn’t the real thing” and agreed to divorce. Their tax adviser had to think about boring tax stuff (but now maybe also early retirement). For the tax year 2017-18, no assets changed hands and we would argue that on 5 April 2018 they are definitely still living together even if Ken moved out in that tax year. 2018-19 was different, but when did they stop “living together”? Assets transferred during the year of separation qualify as tax free, even if that transfer follows the “not living together” moment.

What is the Year of Their Separation?

Here’s the crux: when they transferred assets on 7 April 2020, was it too late, being in the next tax year? If so, there may be some capital gains tax to pay. If separation became permanent during 2019-2020 there’s a tax problem looming. In November 2019 they sat (Ken reluctantly so) at Barbie’s pink dressing table and Googled (which is now a verb) “Divorce”. There are quite a lot of financial things they agreed on, and they decide that until it’s over, whatever happens, Ken will move back to the marital home. Barbie will now move to the flat. It was a bit of a palaver because they had to get their addresses and lots of other things, like driving licences and gym club membership changed. Fortunately they saved a heap on removal vans. For three months they sent a lot of inappropriate Facebook messages to one-another about who should petition for divorce. Ken said he could easily “go for it” on grounds of unreasonable behaviour and would gladly declare Barbie’s obsession with collecting pink furniture having noticed it now fills their house! Barbie could easily cite Ken for adultery with Barbie’s best friend, Teresa. It only happened once (she thinks) but for Barbie, it was more the principle and it was all Ken’s fault but she doesn’t want to sully Teresa’s impeccable reputation and after all they are still best friends? So, it’s decided, Ken petitions.

Finally, It’s Divorce O’Clock

Nothing much happens for a while due to public service cutbacks.  In early April 2020 a decree nisi is granted. Ken is beginning to have second thoughts although they then swap the powerboat and Harley Davidson just after Barbie returns from a (power boating) holiday in the South Pacific, telling her girly friend (not the Teresa one) she wants to “wash that man right outta my hair”. So she applies to the court after 134 days because Ken is refusing to play the collectomania card. This takes us to late September 2020. Things drag on for a long time and it gets pretty messy. Barbie is still pretty but Ken’s a mess. In April 2021 the (now somewhat more life like) Teresa knocks secretly on Ken’s pink front door and stops returning Barbie’s Facebook messages. In late June 2021 the decree absolute, weirdly, is granted. Under the Settlement, Barbie agreed to transfer her interest in their home, to Ken. Barbie would keep the flat. As part of this deal, Ken had to transfer his valuable majority shareholding in a UK Plastics company, to Barbie. In the several months that then followed, Barbie sold her flat and then moved to Bali H’ai in the  South Pacific to live forever with Ryan. Ryan developed a liking for Harley Davidsons but is not a friend of Ken. Finally, Ken couldn’t stomach pink wallpaper anymore and sold the house in late April 2022. He craved a new life with Teresa in a house with less furniture and just one mirror over the (anything but pink) dressing table. Their tax adviser took early retirement when he could see the divorce (and the tax car crash) was imminent. Next time, in part two, Maven will work out the tax situation on all of this for Barbie and Ken. Will it be pretty? Will they be in the pink?    

Not really news…. but maybe “News to you”

In this occasional series, we look at things that you might not know but knowing could save you (or someone you know) some money. In this article we look at couples and separation.

Couples and Separation

The average age for a person entering divorce is now 46 for men and 44 for women. National statistics for 2016 (the latest year available) show a 42% divorce rate overall. When a married couple divorce, especially where minors are involved, the first aim should be to maximise the funds available to distribute, before arguing or not over who should get what. Tax can be a factor here and it is prudent, when you are entering separation, to take suitable advice. Separation is a little different from divorce, in taxation terms physical separation itself does not, contrary to popular belief, mean that the capital gains tax spouse exemption for spouses and civil partners, is necessarily lost. If a married couple choose to live apart but the marriage has not broken down, they are regarded as “living together” as long as there isn’t a court order or deed of separation in place.

The Detail is Important, Really Important

Let’s get more specific. Barbara (or Barbie as her friends call her) and Kenneth (aka Ken) are married but decide the plastic Ferrari in the garage simply isn’t enough and they need some space. Barbie owns a flat, just three doors down from their house, and co-owns the house that she and Ken occupy as the marital home. Convenient, eh? In late March 2018 Barbie decides to not re-let the flat and when the tenant leaves she says to Ken “you can stay in it until we decide if we can put up with one another or not”. Ken, with brilliant timing, moves in to the flat on 5th April 2018 but doesn’t get his regular “Back Street Heroes Magazine” re-directed. Tactical, is Ken. They still get on with one another but enjoy having their own space. Barbie likes to sit at her pink dressing table and look at herself and Ken enjoys trying on some old Action Man uniforms he found in the plastic wardrobe at the flat, that just still fit, despite his now enlarged waist. But then, in late April 2019, Barbie meets a new gentleman and Ken, a new lady. Barbie spends less time at her dressing table and Ken spends less time with his Action Man outfits. Towards the end of 2019 they decide, having lived a total fantasy up to now, that “this is the real thing” and agree to divorce. Barbie gives her classic Power Boat (that floats in a bath) to Ken, for free. Ken gives his vintage and highly desirable Harley Davidson (with a built in vroom sound) to Barbie, for free. They are both mad and impetuous fun-loving people and don’t believe in first checking with their tax adviser. They sign over the boat and bike on 7th April 2020 and get this witnessed by a solicitor because they think they’re being clever. Their tax adviser, however, has to think about the boring stuff like tax rather than enjoying oneself in a Power Boat or taking the Harley to the Isle of Man TT, so he puts on his serious hat on a Monday morning after checking his business overdraft. (Divorce is for another day – preferably not a Friday afternoon) but what about this “living together” thing? For the tax year 2017-18, no assets changed hands. Ken moved to the flat, but he is there as Barbie’s rent-free guest. We would argue that on 5 April 2018 they are definitely still living together even if Ken moved out technically in that tax year. 2018-19 is a slightly more grey area but during that year they were still in their loving, if somewhat synthetic, relationship.

When is ‘Separated’ a split as far as the Tax Man sees it?

The issue here is to decide when they stop “living together”. There is no court order or deed of separation so this is when they are in fact separated in circumstances in which the separation is likely to be permanent. We’d argue this was when they met their new partners. It was meeting the new man (with a waist) and the new lady (with a dressing table, mirror and lots more) that triggered the decision to divorce. Presumably because they want to marry again and do it all over again only …. Differently. The year of separation we’d say, was 2019-2020. If assets are transferred during the year of separation, they qualify as tax free, even if that transfer follows the “not living together” moment. Which, unfortunately, doesn’t help Barbie and Ken. They transferred assets after the “not living together” moment but too late, on 7 April 2020, in the next tax year. Which means that the Power Boat and Harley Davidson (worth a lot more now than when bought) will possibly cost them some tax to pay. Oh, if they’d only signed them over before 6th April! Honestly, you could write a book about couples’ tax aspects. Next time, more capers when Barbie and Ken get a divorce.