Nunn Hayward - April 2007

Abacus April 2007

Inheritance Tax, Overseas Homes and 100% Relief?

Following on from our article regarding Inheritance Tax (IHT), Business Property Relief (BPR) and UK furnished holiday lets we now turn our attention BPR and overseas homes.

It is feasible to make a claim for BPR on a foreign furnished holiday let if you are genuinely able to apply the principals which seem to be accepted by HMRC for UK FHLs.

What is paramount in claiming BPR for furnished holiday lettings is not that they are furnished holiday lettings but that it would be hard for the courts to differentiate between the FHL and, say, an hotelier or bed and breakfast business.

IHT will not usually apply to these other businesses because of the level of services provided. This has been recognised by the courts who have distinguished these businesses from the mere exploitation of land. To quote from the comments of a Judge recently:

“The distinction between a hotelier or a lodging house keeper, on the one hand, and the owner of a property who lets furnished rooms and provides services is no doubt in practice a narrow one, more particularly in these days of self-service hotels and motels, but the principle is clear and in the present case there can be no doubt on which side of the line the taxpayer’s activities fall”.

Further guidance is given by HMRC. They state in their own internal manuals: -

"Caravan sites and furnished lettings: Holiday Lettings

The Inland Revenue solicitor has advised the office that in some instances the distinction between a business of furnished holiday lettings and, say, a business running a hotel or a motel may be so minimal that the Courts would not regard such a business as one of “wholly or mainly holding investments” for the purposes of IHT.

Therefore relief is allowed where:

the lettings are short term (for example, weekly or fortnightly); and
the owner – either himself or through an agent such as a relative or housekeeper – was
substantially involved with the holidaymaker(s) in terms of their activities on and from the premises even if the lettings were for part of the year only.”

HMRC assume that a foreign property will be used privately by the owner and hence they tend to look at these much more closely.

However, the principals are the same for a foreign FHL as for a UK FHL. Just because the lettings do not fall under the special tax rules for UK FHL, this does not mean BPR does not apply. The key is to decide whether you are running a business or gaining investment income from land.

To ensure a successful claim it is necessary to document that there are plenty of services provided, most of which are commercially beneficial to provide, in any event.

For instance the concept of concierge service is very common when letting holiday homes in America and Canada. The concierge services on offer might include:-

- Welcome groceries
- Midweek gourmet chef
- Golf bookings
- Theatre bookings
- Restaurant bookings
- Health Spa bookings
- Yacht charter
- Fishing excursions
- Mid week maid services
- Baby sitting

Other jurisdictions have different practices, but with our help and a little lateral thought, the possibility of 100% BPR on your overseas holiday home may be possible.

We at Nunn Hayward can help you identify this and other tax planning possibilities, as well as ensure you gather contemporaneous evidence to support your position, should you ever be challenged by HMRC.

If you have any queries regarding the above article contact Steve Cook, Tax Partner at steve@nunn-hayward.com or tel: 01753 888211.

Changes to Spanish Taxation of Property for UK Residents

There have been significant changes made to the Spanish taxation system this year and many of the changes which came into effect on the 1st January affect property in Spain and foreign or non-resident owners of Spanish property.

We summarise below the key changes, based on a press release from the Federation of British Estate Agents in Spain.

As from January the 1st Spanish Capital Gains Tax (CGT) levels have dropped from 35% to 18% for non-residents which is now the same rate that Spanish nationals pay.
Withholding tax payable by non-resident purchasers of Spanish property has also dropped from 5% of the purchase price to 3%.

As can be seen these changes are very positive indeed from a taxation perspective.

However, other changes have made it less attractive to buy property in Spain through either an offshore or onshore company structure.

Previously investors in property who planned to deal real estate in Spain or indeed let out property assets could, where the sum involved justified the professional fees, reduce their property related tax burden through the use of an onshore asset holding company. Now the government has changed the way it regulates and taxes such companies so that they are probably no longer attractive vehicles through which to purchase and hold property in Spain.
New tax rules affecting these types of company see tax rates rise to between 25% and 30% and so it is highly likely that most company owners who solely own real estate within their company structure will make use of the amnesty/transition period the government is allowing, during which time they can close the company and acquire their property assets in their own name.
Regarding offshore companies, those whose primary assets are Spanish real estate will now be considered as resident in Spain and taxed accordingly – therefore it makes little or no sense to use this route when buying.

If you have any queries or concerns regarding this article contact Steve Cook, Tax Partner at steve@nunn-hayward.com or call 01753 888211.

HMRC Annual Report - Enquiries The Facts

HM Revenue & Customs Annual Report 2005-2006

Some Facts & Figures
	Cases taken up	Additional tax, interest & Penalties

Corporation Tax Full Enquiries	4,547	£109.2m
Corporation Tax Aspect Enquiries	39,109	£648.4m
Income Tax Full Enquiries	27,644	£211.2m
Income Tax Aspect Enquiries	36,721	£96.8m
Personal	100,093	£268.1m
Employer’s Reviews	29,451	£376.8m
Late Filing Penalties	£92.8m
Individuals who submit accurate Returns	67.0%
Employers who submit accurate returns	63.0%
Full enquiries which result in the detection of non-compliance	82.4%

Did you know?

■ The number of enquiries issued by HMRC on average equalled one every 30 seconds of every working day.

■ By 31.01.06, two million SA returns were processed by HMRC, 258,000 during the five busiest days and almost 150 a minute at its peak.

■ Between 17.10.05 and 30.11.06 the Tax Evasion Hotline received approximately 80,000 reports of potential tax evasion. The help line also encouraged an additional 8,000 people to register as self employed.

■ During 2005-06 HMRC successfully accrued £405 billion in taxes, duties and other revenue, an increase of over £26 billion (+7%) on the previous year. Revenue for corporation tax accounted for 10% of the total and was £8.4 billion (+25%) higher than 2004-05.

■ £828 million (+16.8%) of additional VAT was identified from over 134,000 risk-based interventions.

■ Integrated Hidden Economy and Dedicated Risk Teams were rolled out and secured 6,286 VAT registrations and additional revenue of £40.4 million. 35,901 ‘ghost’ business (businesses or individuals who should be registered) and ‘moonlighters’ (those known in some capacity, but who have another undisclosed source of income) were identified, yielding £50.8 million.

■ 181,000 advice letters were issued to the construction industry and share fisherman projects, as well as to people involved in the property sector and those with untaxed bank interest.

■ Under the National Minimum Wage (NMW), £22 million wage arrears have been identified since 1999. During 2005-06, more than 4,900 investigations were completed; the incidence of non-compliance detected was 32%. During July 2005, 500 hairdressers were targeted and registered. Of those investigated and closed, 49% were found to be non compliant. From April 2007, the resource devoted to NMW enforcement will be increased by 50%.

All Nunn Hayward clients should have received a communication from us giving details of the Fee Protection Insurance we offer. If you are interested or wish to discuss in further detail please contact Iona Stayt at Iona@nunn-hayward.com or call 01753 888211.

Please contact us to discuss the above further

Tel: 01753 888211 Fax: 01753 889669 Email: abacus@nunn-hayward.com
Nunn Hayward, Sterling House, 20 Station Road, Gerrards Cross, Bucks SL9 8EL.

Chartered Accountants, Registered Auditors and Insolvency Practitioners. This publication has been prepared as a guide only to topics of current financial and business interest. It is not intended to be a substitute for professional advice. No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by either the authors or Nunn Hayward. All rights reserved.

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