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    Business Asset Disposal Relief for Trusts and Trustees

    Business Asset Disposal Relief for Trusts and Trustees – Introduction

    Business Assets Disposal Relief (“BADR”), formerly known as Entrepreneurs Relief, is an important relief in the UK tax system.

    The relief offers significant savings (though not as significant as it once did!) on capital gains from the sale of qualifying businesses.

    Understanding BADR Eligibility

    BADR is primarily accessible upon the sale of shares in a private trading company, assuming specific conditions are met.

    A fundamental criterion is the notion of the “personal company.”

    This concept encompasses individuals who have been directors or employees holding a minimum of 5% of the company’s shares for at least two years leading up to the sale.

    Notably, before 2019, the required holding period was one year.

    The scope of BADR also extends to trustees, particularly when dealing with life interest trusts.

    Here, the relief is applicable if the trustees sell shares in a company that is the personal company of the life tenant — the beneficiary entitled to the trust’s income.

    The catch, however, lies in meeting the personal ownership requirement of 5% of the shares by the life tenant.

    Peter Buckley Settlement v HMRC – Background

    The stringent nature of BADR’s conditions was starkly highlighted in the First Tier Tax Tribunal case of Trustees of the Peter Buckley Settlement v HMRC.

    Here, in tax year 2015-16, the settlement lodged a claim for Entrepreneurs’ Relief (ER), now BADR, on the disposal of a solitary share in Peter Buckley Clitheroe Ltd (PBCL) dated 8 November 2015.

    PBCL acted as a trading entity with Peter Buckley (PB) serving as a director from its inception until 9 November 2015.

    The company’s equity was comprised of one Ordinary voting share initially allocated to PB but subsequently transferred to the settlement on 9 September 2012.

    In January 2018, HMRC initiated an inquiry into the settlement’s ER claim and, by May 2021, issued a Closure notice.

    This notice rejected the settlement’s ER claim and imposed an additional Capital Gains Tax (CGT) liability of £251,280.

    HMRC contended that to legitimately claim ER on the share sale, PB was required to personally possess a minimum of 5% of PBCL’s shares for a year within the three-year period preceding the settlement’s share disposal, a criterion that was unfulfilled since the sole PBCL share was in the settlement’s possession since 2012, not in PB’s personal capacity.

    The trustees appealed to the First Tier Tribunal (FTT).

    The FTT Case

    The FTT established that PB, in his capacity as a trustee of the settlement and not as an individual owner, held the sole PBCL share.

    The trustees, despite having the authority to terminate the settlement in PB’s favor, did not execute this before 8 November 2015.

    Consequently, the PBCL share was invested in the settlement immediately before its sale.

    Given that PB did not personally own the PBCL share as mandated by s169S(3) TCGA 1992, HMRC’s rejection of the ER claim was justified.

    The tribunal underscored that the legislative intent was clear: to qualify for ER, PB had to personally hold at least 5% of the shares and voting rights in PBCL for one year within the three years before the disposal, which he did not, leading to the disallowance of ER and the dismissal of the appeal.

    The complexities of trust ownership and the stringent requirements of BADR converged to result in the trustees being denied relief on the sale of company shares, leading to a significant tax liability.

    This case serves as a crucial reminder of the meticulous planning required when considering shareholding structures, especially in the context of trusts.

    Business Asset Disposal Relief for Trusts and Trustees – Conclusion

    In conclusion, while BADR presents a valuable opportunity for tax savings, its intricate conditions and interplay with trust structures underline the need for diligent planning and expert guidance.

    As entrepreneurs and trustees seek to navigate these waters, proper tax advice remains key.

    Final thoughts

    If you have any queries about this article on Business Asset Disposal Relief for Trusts and Trustees or any UK tax matters, then please get in touch.

    Lifetime Allowance changes – an overview

    Lifetime allowance changes – Introduction

    In July the Government published draft legislation dealing with the abolition of the lifetime allowance (LTA) with effect from 6 April 2024.

    The draft legislation provides for the introduction of two new lump sum allowances which will apply to an individual and are used when a relevant lump sum is paid in respect of an individual and at least part of that lump sum is tax free.

    The new allowances are the lump sum and death benefit allowance of £1,073,100 (the same as the LTA immediately before its abolition) and the lump sum allowance of £268,275 (25% of the LTA immediately before its abolition).

    More detail on the new lump sum allowances

    The individual’s lump sum allowance is used when the individual takes tax free cash in the form of:

    The individual’s lump sum and death benefit allowance is used when the individual takes tax free cash in the form of an authorised lump sum and also when a person receives tax free cash in the form of an authorised lump sum death benefit in respect of the individual.

    Where part of a lump sum is taxable and part isn’t, only the tax free element counts towards the relevant lump sum allowance.

    Pension benefits will be taxed through the existing income tax structure for pension income. To the extent that a lump sum is taxable, it will normally be taxed at the recipient’s marginal rate of income tax.

    A “pension commencement lump sum” equating to 25% of the value of the benefits being taken can generally be taken tax free provided the individual has sufficient headroom available under both types of lump sum allowance. 25% of an UFPLS will also be tax free provided the individual has sufficient lump sum allowance headroom.

    Any amount in excess of the limits will be taxed as pension income.

    Lump sum death benefits paid within 2 years in respect of a deceased member aged under 75 will generally still be tax free provided there is sufficient headroom under the deceased individual’s lump sum and death benefit allowance. Any excess will generally be taxed as income in the hands of the recipient.

    LTA protections

    The draft legislation contains extensive provisions dealing with individuals who currently benefit from the various statutory protections in relation to the LTA.

    “Primary protection” will cease to exist, but will be replaced with a new set of protections.

    For individuals with enhanced protection, their “applicable amount” for a pension commencement lump sum is the amount that could have been paid on 6 April 2023.

    The deadline for applying for fixed/individual protection 2016 will be 5 April 2025.

    Transitional measures

    The Government plans to publish transitional provisions to deal with the situation where one or more lump sums have been paid in respect of an individual before 6 April 2024, but at least one further lump sum is paid on or after that date.

    No intention to significantly expand pension freedoms

    When the draft legislation was first published, the Association of Consulting Actuaries suggested that it would have the effect of extending to defined benefits the “pension freedoms” that have applied to money purchase benefits since 6 April 2015.

    In its Pension schemes newsletter 152 HMRC has confirmed that it is not the Government’s intention to significantly expand pension freedoms.

    Conclusion

    As we prepare for the abolition of the lifetime allowance (LTA) and the introduction of new lump sum allowances in April 2024, the UK pension landscape is undergoing a transformative shift.

    These changes, unveiled in the government’s draft legislation, bring both challenges and opportunities for individuals and pension scheme providers.

    Understanding the intricacies of the individual lump sum allowance, the lump sum and death benefit allowance, and the taxation implications for various scenarios is paramount.

    The introduction of transitional measures and the preservation of certain protections, albeit with modifications, underscore the government’s commitment to managing this transition smoothly.

    Importantly, HMRC’s assurance that there will be no significant expansion of pension freedoms in relation to defined benefits provides clarity in an ever-evolving landscape.

     

    If you have any queries about the lifetime allowance changes, or any other UK tax matters, then please do get in touch.

    National Party unveils ‘back pocket boost’

    Back pocket boost – Introduction

    In a bold move aiming to alleviate the financial pressure on the middle class, the National Party has unveiled their ‘Back Pocket Boost’ Election Tax Plan.

    With a focus on tax relief and strategic revenue measures, this $14.6 billion tax cut policy is set to bring substantial changes to New Zealand’s economic landscape.

    Tax reform and relief

    At the heart of the ‘Back Pocket Boost’ plan lies a dual approach: approximately $8.4 billion in cuts and $6.2 billion in revenue increases.

    The key ambition is to reduce Government expenditure while also streamlining contractor and consultant spending.

    Rental properties and property transactions

    A pivotal change proposed by the National Party revolves around rental properties.

    The plan seeks to fully restore interest deductibility for these properties, with a comprehensive implementation expected by April 2026.

    Additionally, the Brightline test, which assesses capital gains tax on rental properties, will undergo a significant transformation. The existing ten-year rule will be shortened to just two years by July 2024.

    This alteration implies that properties acquired before July 2022 will be exempt from the Brightline test upon sale.

    However, the plan also entails the removal of the depreciation tax break for commercial buildings, previously introduced in response to the post-Covid landscape.

    Foreign buyer tax and climate dividend

    National’s plan includes an assertive approach towards foreign property buyers.

    A 15% foreign buyer tax will be introduced for home purchases valued at $2 million or more, excluding individuals without a resident class visa.

    To respect the existing agreements with Australia and Singapore, citizens from these nations will be exempted from this new tax rule.

    The introduction of a Climate Dividend is another standout feature. Revenue generated from the Emissions Trading Scheme will be earmarked to provide tax relief to individuals, pivoting away from subsidizing large corporations.

    Similarly, revenue from the Climate Emergency Response Fund will be directed toward this endeavor.

    Regulatory landscape and tax bracket adjustments

    National is also committed to a proactive regulatory environment. They intend to establish a regulatory framework for online casino gambling to ensure offshore operators comply with tax regulations.

    Tax bracket adjustments form a crucial facet of the plan. Changes to threshold amounts for marginal tax rates will facilitate tax relief for the middle class.

    While there will be alterations to the middle-class threshold rates, National has confirmed that the 39% top tax rate on income exceeding $180,000 will remain unchanged in their first term.

    Tax credit expansion

    The National Party envisions enhancing after-tax income through a series of tax credit expansions:

    Repealing Tax Mechanisms

    The plan includes the repeal of several tax mechanisms, including the controversial “App Tax,” the Auckland Regional Fuel Tax, and the Ute Tax, indicating a commitment to simplify and refine the existing tax structure.

    Visa Processing Reforms

    In a bid to align with global practices, National intends to implement a ‘user pays’ visa processing model, effective from 1 July 2024.

    While this will result in increased visa processing fees for most applicants, Pacific Island origin applications will remain exempt. A priority processing fee will also be introduced to expedite applications.

    Conclusion

    The National Party’s ‘Back Pocket Boost’ Election Tax Plan is poised to reshape the tax landscape of New Zealand.

    By addressing the needs of the middle class through tax relief, credit expansions, and strategic revenue measures, the plan endeavors to foster economic growth while easing the financial burden on individuals and families.

    As the election approaches, the implications of these proposed changes on the nation’s economic future will undoubtedly take centre stage.

    If you have any queries about the so-called back pocket boost, or New Zealand tax matters in general, then please get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article

    Israel’s new Angels Law unveiled – a boost to the high-tech sector?

    Israel’s new Angels Law – Introduction

     

    In a bold move to bolster its standing as a global high-tech hub, Israel recently introduced the revamped Angels Law, packed with enticing tax incentives to attract investors into its burgeoning tech sector.

     

    The legislation, effective until the end of 2026, is a strategic successor to the original Angels Law that concluded its run in 2019.

     

    This reinvigorated legal framework seeks to accelerate investment in Israeli high-tech startups while offering an array of tax benefits that promise to reshape the landscape of tech investments.

     

    Tax Credit

     

    In order to ignite investment in high-tech startups under specific criteria, the new Angels Law delivers a tax credit as a carrot to investors who put their money into Israeli high-tech startups.

     

    This credit is calculated by multiplying the investment amount by Israel’s applicable capital gains tax rate – a tax credit that mirrors what would have been levied had the investor sold their allocated shares within the same tax year of investment.

     

    This is a game-changer that empowers investors to recoup a portion of their investment costs swiftly, thus paving the way for lower entry barriers to high-tech startups.

     

    However, there’s a cap of ILS 4 million for this tax credit, and unused credit can be carried forward to future tax years.

     

    Deducting Investment from Capital Gains

     

    The Angels Law introduces the concept of deducting investments in Israeli high-tech startups from capital gains realized through the sale of shares in other high-tech companies.

     

    For this benefit to kick in, the investment must be made within 12 months before or 4 months after the shares’ sale.

     

    By allowing investors to trim their capital gains with the investment amount, this provision optimizes the tax landscape for experienced investors, fostering a nurturing environment for their invaluable business acumen.

     

    Deduction of Acquisition Costs

     

    In an innovative twist, the Angels Law permits an Israeli high-tech company that acquires control over another local or foreign high-tech entity with a “beneficial intangible asset” to deduct the purchase cost from its “preferred technological income.”

     

    This deduction can be claimed over five years, post-acquisition.

     

    This shift empowers companies to manage their profitability during the early stages post-acquisition, giving time for strategic investments to mature.

     

    Tax Exemption on Interest Income

     

    Large Israeli high-tech firms often look to foreign financial institutions for funding due to restricted domestic financing options.

     

    The new Angels Law aims to ease this burden by granting foreign financial institutions tax exemption on interest income generated from loans extended to Israeli high-tech firms.

     

    This exemption aims to reduce the financial strain on tech firms, facilitating smoother access to essential funding from global sources.

     

    Israel’s new Angels Law – Conclusion

     

    With the clock ticking until the Angels Law’s expiration at the close of 2026, the window of opportunity for both local and foreign investors to capitalize on these lucrative tax benefits is a limited one.

     

    Israel’s high-tech sector is now primed for an influx of investments, as startups and established tech giants alike stand to gain from these enticing incentives.

     

    As the world watches, Israel is poised to maintain its reputation as a tech powerhouse with innovation-friendly policies that will reverberate throughout the global investment landscape.

     

    If you would like more information about Israel’s new Angels Law or Israeli tax matters in general then please get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article..

    Research & Development Tax Changes in UK

    Introduction

    The UK’s R&D regime has been incredibly attractive for many years.

    Further, HMRC has consistently taken a ‘light touch’ approach to its supervision of the regime.

    However, it has been clear for a number of years that there is a core of ‘specialist’ companies that might have taken a somewhat bullish approach to some of their claims.

    As such, for some time, there has been speculation over whether the regime is ripe for reform.

    To an extent, we are now starting to see that reform reflected in the changes recently announced / confirmed at the recent fiscal events.

    Further, over the weekend, we have seen the Treasury open a consultation on reforming the R&D regime. The proposal is that the current dual system of an SME and a RDEC regime is merged into one.

    Change is certainly coming…

    Overview

    There will be material changes to the UK’s Research & Development Tax regime.

    These will be introduced with effect from 1 April 2023.

    The changes will impact:

    It is stated that the measures will ensure that:

    It is clear that the changes to the SME scheme are being introduced as a response to perceived error and abuse of the regime. It is a shame that some bad actors have resulted in a dialling back of the benefits for all SMEs.

    In addition, the new consultation release suggests the government is eye-ing up a merged, unified regime.

    Changes to the rates of relief

    General

    The rate and form of relief depends on whether the company can claim under the SME regime or only under the R&D expenditure credit (“RDEC”) regime. Large companies can only claim under RDEC along with some SMEs who are outside of the SME regime.

    SME regime

    Under the SME regime relief is available as follows:

    RDEC regime

    As referred to above, this is targeted at larger companies. However, in certain circumstances, it might be an SMEs claiming RDEC.

    The RDEC uses a different method of calculating corporation tax relief on R&D expenditure. This is sometimes referred to as an “above the line” credit claimed as a cash payment.

    Changing rates

    For expenditure incurred on or after 1 April 2023 the various rates will change. The old and new rates are as follows:

    Profile of taxpayerUp to 31 March 2023From 1 April 2023  
    RDEC CompanyRDEC Credit: 13% Corporation tax (“CT”) rate: 19% Benefit: 10.5%RDEC credit: 20% CT rate: 25% Benefit: 15%
    SME (in profit)Enhanced deduction: 130% Benefit: 24.7%Enhanced deduction: 86% Benefit: 21.5%
    SME (loss-making)R&D credit: 14.5% Benefit: 33.4%R&D credit: 10% Benefit 18.6%

    Focussing relief on UK activities

    In addition to the above, the Government is also introducing territorial restrictions to the regime.

    These rules will apply to subcontracted R&D expenditure along with payments for externally provided workers (“EPWs”).

    Subcontracted R&D activity will need to be performed in the UK.

    EPWs will need to be subject to UK PAYE.

    Expenditure in respect of overseas activity will still qualify in some limited circumstances.

    Data licences and cloud computing as qualifying expenditure

    In better news, expenditure on the cost of data licences and cloud computing will now constitute qualifying expenditure.

    Making an R&D claim – revised process

    Companies will be subject to a new online pre-notification requirement where:

    The new procedure means that the company must inform HMRC of:

    within six months of the end of the relevant accounting period (unless the full claim has been submitted within the six-month deadline.) Previously, the only deadline has been the two year (following the end of the relevant accounting period) deadline for making a claim.

    New Government Consultation on a unified R&D regime

    As stated above, these changes are also now joined by the announcement over the weekend of a new Government consultation on a new, unified R&D regime.

    In a previous consultation, had asked views around whether the two schemes should be merged into one. This new consultation develops that idea further.

    It appears that the government is coalescing around an ‘above the line’ credit for all parties. In other words, the SME regime will be replaced by a regime that looks more like RDEC for all.

    The consultation document also alludes that additional relief might be available to either “R&D intensive companies” and / or “different types of R&D”. In the case of the latter, it might be that relief is targeted at activity with a “social value”.

    Following on from any consultation, the new unified regime will be announced at a future fiscal event and implemented, as things stand, for expenditure incurred from 1 April 2024.

    Conclusion

    The reduction in the rate for SMES is disappointing. This is particularly the case for start-ups for which the ability to claim the repayable tax credit can be an important source of cash.

    On the other hand, the increase in the RDEC is to be welcomed and should make the UK’s scheme more competitive internationally.

    It is good to see that the categories of qualifying expenditure will be expanded to include data and cloud computing.

    The changes in the process for making an R&D claim will be particularly relevant for companies who have not made a claim in the past. They will need to get their affairs in order much more quickly bearing in mind the new six-month deadline.

    Finally, the enthusiasm for a unified system is perhaps not wholly unexpected either. The UK is perhaps unusual in offering a dual system.

    It is hoped that the Government and all stakeholders can bash into shape a unified system t that preserves the attractive benefits for those currently utilising SME relief and RDEC but manages to ensure that relief is properly targeted and abuse minimised.

    Watch this space.

    If you have any queries relating to the Research & Development Tax Changes in the UK or tax matters in the UK more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    Digital Games Tax credit announced

    Introduction

    Ireland’s Minister for Finance recently formally launched the Digital Games Tax Credit.

    The measure was originally provided for in Finance Act 2021 subject to commencement order and, importantly, EU State Aid approval.

    The European Commission has now provided that approval and  a commencement order has now been passed.

    It is expected that qualifying certificate holders are able to avail themselves of the relief from 1 January 2023.

    Digital Games Tax Credit What is it?

    The credit takes the form of a refundable corporation tax credit in respect of qualifying expenditure on:

    The Digital Games Credit is available to digital gaming development companies that are

    The rate of the credit is 32% of eligible expenditure. This is capped at a limit of €25m per project. A minimum project spend of €100,000 also applies.

    Qualification

    There are a number of requirements that must be satisfied in order to qualify for the credit, including:

    Nature of game

    The game must be one which integrates digital technology, can be published on an electronic medium, is interactive/built on an interactive software and incorporates as least three of the following elements:

    The digital game should not be produced solely / mainly as part of a promotional campaign or be used as advertising for a specific product.

    Further, the game must not be produced solely or mainly as a game of skill or chance for a prize comprising money or money’s worth.

    Qualifying expenditure

    There is a requirement for expenditure to be incurred directly by the digital games development company on the design, production and testing of a digital game.

    The categories of expenditure that may qualify for relief include:

    Certification

    A company must obtain certification from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media.

    When deciding whether it will grant such a certificate then the Minister will have regard to a matrix of cultural requirements. A points system is applied in assessing the merits of the application.

    Under the rules, there is a provision for the issuing of:

    Making a claim for the Digital Games Credit

    Where a company has been issued with an interim certificate then the credit can be claimed within twelve months following the end of the accounting period in which the expenditure was incurred.

    Alternatively, where a company has been issued with a final certificate, the company may make a final claim after deducting any amounts that have already been received under an interim certificate.

    Process for claiming relief

    The Digital Games Credit is first offset against any corporation tax liability company for the relevant accounting period.

    However, where there is no corporation tax liability or if the credit takes the company into a loss-making position, then the Company may make a claim for a cash refund.

    If you have any queries about the Digital Games Credit or Irish tax matters more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article