How do you create a Group using Share Exchange/Swap? Why is it done?

photo of man holding pen

Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.

Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.

In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).

Why?

Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.

During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.

So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.

Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252

Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

How?

The process basically has 4 stages.

Stage 1 – Form the new companies

Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.

Stage 2 – HMRC Clearance

Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)

To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.

You can request advance clearances by sending an email to reconstructions@hmrc.gov.uk. You do not need to send a paper copy.

Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.

If possible we would like to reply by email, but we need your permission to do so by including the following statement:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’

If you’re making the application on behalf of yourself or your company adapt this wording as necessary.

Stage 3 – The Contract

This is normally done by a solicitor.

The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.

Stage 4 – Stamp Duty Relief

As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.

steve@bicknells.net

Can I just move my Buy to Let into a partnership and then incorporate?

If you have a large portfolio (because that could be seen as business) then this might be possible but not if you only have a single property (or if its a small portfolio).

Forming a partnership has been seen as milestone on the route to incorporation, incorporation will mean that Section 24 interest restrictions don’t apply, which can save substantial amounts of tax.

Incorporation Tax Relief

The Ramsey case set out a basis for incorporation tax

EM Ramsay v HMRC [2013] UKUT 0226 (TCC)

Mrs Ramsey carried out the following activities

  1. Mr & Mrs Ramsey personally met potential tenants
  2. Mrs Ramsey check the quarterly electric bills
  3. Mrs Ramsey arranged insurance
  4. Mrs Ramsey arranged and attended to maintenance issues (drains)
  5. Mrs Ramsey and her son maintained the garages and cleared rubbish
  6. Mrs Ramsey dealt with post
  7. Mrs Ramsey dealt with fire regulation issues
  8. Mrs Ramsey arranged for a fence to be erected
  9. Mrs Ramsey created a flower bed
  10. Shrubs were pruned and leaves swept
  11. The parking area was cleared of weeds
  12. The flag stones were bleached
  13. Communal areas were vacuumed
  14. Security checks were carried out
  15. She took rubbish to tip
  16. She cleaned vacant flats
  17. she helped elderly tenants with utilities

This work equated to at least 20 hours per week and Mrs Ramsey had no other employment.

It is because she did the work herself that her property investment was considered a ‘Business’ and eligible for Incorporation Tax Relief.

SDLT

Partnerships have special rules on SDLT relating to incorporation.

The rules on SDLT for Partnerships are in the Finance Act 2003 Schedule 15 and amendments in the Finance Act 2006 Schedule 24.

http://www.legislation.gov.uk/ukpga/2003/14/schedule/15

http://www.legislation.gov.uk/ukpga/2006/25/schedule/24

It is complicated but essentially it comes down to the following formulae

MV x (100 – sum of lower proportions (SLP))%

What this means is that if the land being put into the partnership is effectively retained by the transferor-partner (or persons connected with the transferor) after the transaction, you basically end up with:

MV x (100-100) = £0

So a husband and wife partnership owning 50% each could transfer the property to a company for 50% of the shares each and in theory there would be no SDLT charge.

What’s the problem for small portfolios

Take a look this tax question of the week My VIP Tax Team question of the week: Finance Costs Restriction (cronertaxwise.com)

Two of my clients, a married couple, have jointly held residential investment property. The husband is a higher rate taxpayer and the wife is a basic rate taxpayer and they would like to change the allocation of the property income. They do not want to change their 50/50 capital interest so have decided to form a general partnership to take advantage of exception C within ITA 2007 S836 to the assumption they are beneficially entitled to the income in equal shares. Their property portfolio is mortgaged. As the husband has income from other sources, he has fully utilised relief for all finance costs attributed to him. The wife has cumulative unrelieved finance costs, due to her personal allowance mitigating her tax liability on the property income. Can those unrelieved finance costs be carried forward and relieved against tax liabilities on property income from the partnership?

Alexandra Fielding – Croner 4/5/22

There are two issues you raise which need to be addressed.

The first is the formation of a partnership to enable more of the property income to be allocated to the wife.

Although, as you say, a partnership means the assumed 50/50 income entitlement of s836 ITA 2007 does not apply, this is not the end of the matter. A non-commercial allocation of profits within a partnership is still within the settlement legislation of s624 ITTOIA 2005 and can apply to all partnerships and LLPs. This is a view confirmed by HMRC at TSEM4215.

The allocation of more of the profits to the wife without a corresponding increase in her share of partnership equity simply to avoid income tax would be caught by the settlement legislation. The exception in s626 ITTOIA 2005 for transfers between spouse/civil partners would not apply as this would be “wholly or substantially a right to income” without a corresponding transfer of partnership equity. If the couple’s particular rental properties require personal involvement of time and effort and such work is only carried out by the wife, or most of it is carried out by the wife, then it may be possible to commercially justify a greater share of the partnership profits to be allocated to the wife. How much would depend on the time spent and the nature of the work undertaken.

I would add that whether the particular rental properties constitute a “business” that meets the requirements of the Partnership Act 1890 depends on the facts involved. Although not an issue actively pursued by HMRC at the moment, there is a published view from HMRC at PM131800 which states:

The letting of jointly owned property does not normally constitute a partnership. Most cases will fall short of the degree of business organisation needed to constitute a business. The provision of significant additional services in return for payment may be an indicator of such business organisation.

The second issue relates to the unrelieved finance costs.

The rules to determine the entitlement to relief of non-deductible costs of a dwelling-related loan for an individual are contained within ITTOIA 2005 S274A and S274AA. Section 274A(3) tells us the relievable amount for a tax year is the total of the individual’s current-year restricted finance costs (if any) for that year in respect of that business and the unrelieved individual’s brought-forward restricted finance costs (if any) for that year in respect of that business.

The legislation restricts the tax reduction for finance costs so that a reduction can only be made against the income tax liability on the same property business to which the finance costs relate.

Although the properties and the individuals carrying on the letting activities will remain the same after the partnership is formed, for income tax purposes the partnership property business is a separate property business to that previously carried on by the individuals (ITTOIA 2005 S859(2)). This rule pre-dates the finance costs restriction and is covered by HMRC at PIM1030.

Therefore, unrelieved dwelling-related loan costs accumulated by the wife will be lost on the formation of the general partnership.

Whilst the wife’s only source of income is property income, she may continue to accumulate unrelieved finance costs. Your clients may want to consider allocating more of the underlying ownership of the property to the wife or transferring other income producing assets to utilise her personal allowance to maximise finance cost tax reductions.

Form 17 – Joint Ownership Proportions

For jointly owned property Form 17 and Declarations of Trust can be used to change the split of ownership.

When you make a declaration it must apply equally to ownership and income and a couple must be married or civil partners, you can’t be separated or divorced or joint tenants.

Form 17 is used to make the declaration

You can use this form to declare a beneficial interest if you hold property jointly and:

• you actually own the property in unequal shares, and

• you are entitled to the income arising in proportion to those shares, and

• you want to be taxed on that basis.

Form 17 must be submitted with in 60 days of completion, in addition a Declaration of Trust is likely to be required.

If there is a change, even a minor change, after submitting the Form 17 it will be invalid and revert to 50/50.

If the property is held in a single name it may be possible to use a declaration of trust to confirm joint beneficial interest.

Income Tax and Capital Gains Tax will be be based on the beneficial interest in the property, so if one spouse is a higher rate tax payer and the other a lower rate tax payer changing the proportion of ownership could have a significant tax advantage.

steve@bicknells.net

VAT Construction Reverse Charge – what does the Subcontractor Invoice need to look like?

laughing male constructor showing thumb up at working desk

For VAT reverse charge to apply the subcontractor must be able to answer these questions

  1. Is the work being done a construction activity (CIS340)
  2. Are both the Subcontractor and Contractor registered for VAT (and the VAT rate isn’t Zero) and CIS
  3. Does the contractor have an onward supply for Construction Services (in other words they aren’t the end user or an intermediary)

Assuming the answer to all 3 questions is YES then VAT reverse charge will apply and the subcontractors invoice need to look like this one.

Under the VAT Regulations 1995 invoices for domestic reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’. The following examples fulfill the legal requirement:

•Reverse charge: VAT Act 1994 Section 55A applies

•Reverse charge: S55A VATA 94 applies

•Reverse charge: Customer to pay the VAT to HMRC  

The Subcontractors VAT return will look this.

All the major software providers have this covered for you, for example on Sage Accounting you just need to tick a box on Customers Account Settings.

steve@bicknells.net

How do you reclaim CIS deductions?

two man holding white paper

If you don’t have Gross CIS status you may have Construction Industry Scheme (CIS) deductions to reclaim and you will be probably be trying to reclaim now as we have concluded a tax year (5th April and submitted returns due on the 19th April).

Sole traders and partners

At the end of the tax year, send in your Self Assessment tax return as usual. You should record:

  • the full amounts on your invoices as income
  • any deductions contractors have made in the ‘CIS deductions’ field

HM Revenue and Customs (HMRC) will work out your tax and National Insurance bill and take off any deductions made by contractors.

Limited companies

The process for companies is different, companies may well have offset Subcontractors deductions and payroll against deductions made by their clients using CIS132 How to offset Construction Industry Scheme deductions – CIS Offsetting (CIS340 4.13) – Steve J Bicknell Tel 01202 025252

So the first step to work out the net amount to reclaim and check it to the HMRC Government Gateway.

You can choose to:

  1. Form R38 to claim the Refund – Claim an Income Tax refund – GOV.UK (www.gov.uk)
  2. Claim online via your government gateway (agents will use their Agent Services Account) – Claim a refund of Construction Industry Scheme deductions if you’re a limited company or an agent – GOV.UK (www.gov.uk)
  3. Claim by Post

Claim via the Government Gateway

When you click this option ad log in you will get an access code xxx-xxx-xxx, keep a not of this code, the next screen asks you to enter it.

The you can choose

  • New Claim
  • Amendment

I think the amendment option is very helpful in case you make a mistake (shame we don’t get this for other taxes like VAT or PAYE)

Then the questions are

  • Name
  • Agent details and address (if its being claimed by an accountant)
  • Business details
    • Name
    • UTR
    • PAYE reference
    • Tel No
    • Business Address
  • Tax Year for the claim ie 6th April 2021 to 5th April 2022
  • Estimated overpayment (note the word estimated) this the net amount from the CIS132
  • Do you want to offset against other taxes Yes/No
  • Would you like a Cheque or Bank Transfer
  • Bank details for bank transfer
  • E Mail for confirmation

Then you will get a confirmation via E Mail ‘Claim repayment of deductions from your Construction Industry Scheme payments’ it will have another reference xxx-xxxx-xxx

You’ll normally receive a response within 25 days.

Claim by Post

Write to us and make sure that you include:

  • your full company name
  • your PAYE reference numbers
  • the reasons for the overpayment
  • a completed R38 form if you want your refund to be paid to an agent or other representative

If you want us to pay the refund into a bank account, you’ll need to provide the:

  • bank account number
  • sort code
  • account holder’s name

If you want us to deduct your repayment from other amounts you owe for:

  • Corporation Tax — include your Corporation Tax unique tax reference and either the end date of your accounting period or accounting period number
  • VAT — your registration number and the VAT Return period
  • other liabilities — include type of charge, year or period it refers to and any reference numbers you have

You do not have to send any supporting information with your claim, but we may request further details if your claim does not match their records.

Mark your claim ‘CIS’ and send it to:

National Insurance Contributions and Employer Office
HM Revenue and Customs
BX9 1BX
United Kingdom

steve@bicknells.net

How are HMRC attacking the use of TOMS for serviced accommodation?

The Tour Operators Margin Scheme (TOMS) was created for holiday companies.

Accommodation that is bought in and sold without material alteration, falls within TOMS. However, where there is material alteration the accommodation becomes an in-house supply and TOMS can not be used.

Further details are in Notice 709/5

7.6 How an in-house supply of accommodation is made

If you own a hotel and supply accommodation within it, you are making an in-house supply of accommodation.

If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation.

Also, if you buy in accommodation and provide catering staff from separate sources, for example a ski chalet with a chalet-maid, you are making an in-house supply, commonly referred to as ‘catered accommodation’.

HMRC are attacking the use of TOMS for Rent to SA

  • Rent to SA is not a tour operator and the services being supplied are not designated travel services – tour operators organise travel in their own name and entrust others with the supply
  • The supply made by the landlord is not a ‘designated travel service’ – taking a lease of residential premises, whether furnished or unfurnished for a term of years is not a relevant service for TOMS
  • The landlord is not supplying hotel accommodation or short-let accommodation
  • If the SA operator furnishes the property that is a material alteration which means TOMS can’t be used
  • If the contract requires the SA operator to replace broken glass or deal with condensation or do maintenance that would go beyond routine cleaning and minor repairs
  • If the SA operator is responsible for utilities and Council Tax these constitute a material alteration to supply

What about the Landlord?

The landlord is not supplying a Furnished Holiday Let unless they meet the Occupancy Conditions set out in HS253 this will not be the case in Rent to SA as they are not doing short lets they are simply renting out residential property on a long let. They will not be able to claim capital allowances and the they will not avoid section 24 interest restrictions.

steve@bicknells.net

Spring Statement 2022

A summary of the Spring Statement 2022 is now available – click here

We have produced this newsletter to cover the main issues that are most likely to be of interest to you. You will also find useful commentaries to help you understand how the proposed changes may affect you personally. In addition, we have included a detailed calendar of the most important dates for 2022/23 that will help you with tax planning ahead of time. If you have any questions concerning the issues covered in this summary, or would like advice on the best possible course of action in a particular area, please contact us – click here

Have you remortgaged? will that restrict the recovery of interest beyond the Section 24 rules?

Many Buy To Let properties were purchased in individual names, that was norm before, then from 2017/18 we saw the introduction of clause 24 (section 24).

Essentially Section 24 removes Interest from the property expenses and gives you tax relief (finance allowance) at 20% (basic rate). So Higher rate tax payers will pay more tax.

Historically, its been common for BTL owners to regularly remortgage and with draw capital, basically cashing in on house price rises.

But what many owners seem to have overlooked is that if the mortgage exceeds the original property value (including SDLT and related costs) plus any improvement costs, then the mortgage interest is further restricted.

Increasing a mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Examples of how to work out Income Tax when you rent out a property – GOV.UK (www.gov.uk)

steve@bicknells.net

How do you get an HMRC Business Government Gateway, add taxes and add an Agent?

This is a 3 stage process

1. Register for a Gateway

HMRC services: sign in or register

Enter your email address – GOV.UK (access.service.gov.uk)

You will then be asked questions and get a Government Gateway ID

You will be asked choose the type of account from these 3 options

  • Register as an Individual
  • Register as an Organisation
  • Register as an Agent

You need to register as an Organisation

2. Add PAYE/CIS, Corporation Tax, VAT

Watch this HMRC Video to see how its done

CIS is part of PAYE

You will need your Tax Reference Numbers

Company UTR

PAYE Office and Employer Numbers

VAT Number

3. Add your Accountant

Login to your business gateway

Click Manage Account – its in the horizontal menu bar at the top of the screen

Choose Accountants from the list in the middle of the screen

Click the services you wish to add us to

Corporation Tax

PAYE/CIS

VAT

Click Authorise an Agent

steve@bicknells.net

Are HMO’s within the scope of ATED?

ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.

You’ll need to complete an ATED return if your property:

  • is a dwelling
  • is in the UK
  • was valued at more than:
    • £2 million (for returns from 2013 to 2014 onwards)
    • £1 million (for returns from 2015 to 2016 onwards)
    • £500,000 (for returns from 2016 to 2017 onwards)
  • is owned completely or partly by a:
    • company
    • partnership where any of the partners is a company
    • ­collective investment scheme – for example a unit trust or an open ended investment vehicle

Returns must be submitted on or after 1 April in any chargeable period.

Some properties are not classed as dwellings. These include:

  • hotels
  • guest houses
  • boarding school accommodation
  • hospitals
  • student halls of residence
  • military accommodation
  • care homes
  • prisons

It is possible that dwellings contained within the same building can be treated as a single dwelling, and the aggregate value applied.  The details can be found in Section 117 FA 2013.

However, for a standard HMO property, where each of the dwellings is separately accessible, and none can be accessed privately via any of the other dwellings in the property, then none of the property values may need to be aggregated for the £500k threshold.

steve@bicknells.net

What is Class 2 National Insurance and do Landlords need to pay it?

You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension.

Most people pay the contributions as part of their Self Assessment tax bill.

You pay Class 2 if your profits are £6,515 or more a year

ClassRate for tax year 2021 to 2022
Class 2£3.05 a week

So for the whole year that’s £158.60

Are you running a business?

You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

As soon as you reach state pension age, you stop paying Class 2 NIC if you carry on working. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.

In addition Companies who own properties don’t pay national insurance, national insurance is only paid by employees and the self employed.

Class 2 NI would also not apply if you use a letting agent to collect the rents – average fees would be 15%, even if it is a relative or your own company as then your role will only a passive investment role.

The key case on this topic is Rashid v Garcia (Status Inspector) (2002) Sp C 348

Decision released 11 December 2002.

National Insurance – Class 2 contributions – Self-employed earner – Landlord – Taxpayer had income from letting property – Claim for incapacity benefit – class 2 National Insurance contributions paid to qualify for benefit – Revenue took view that property rental activities did not entitle taxpayer to pay class 2 contributions as he was not carrying on business – Benefit refused – Whether taxpayer was self-employed earner carrying on business – Social Security Contributions and Benefits Act 1992, s. 2, 122.

The taxpayer had four properties income £10,942.

It was estimated that the taxpayer spent two to four hours per week on managing the properties and members of his family acting on his behalf spent 16 to 24 hours per week. The Special Commissioner considered this was insufficient activity to constitute a business so no Class 2 NI was due.

Back in 2015 HMRC did try to get Landlords to pay Class 2 as explained in our blog Should Landlords pay Class 2 NI? – Steve J Bicknell Tel 01202 025252

HMRC Examples NIM23800

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

steve@bicknells.net