Business asset disposal relief – cumulative fixed-rate preference shares are part of a company's 'ordinary share capital'
Business asset disposal relief (BADR) (formerly known as entrepreneurs' relief) reduces the charge to capital gains tax (CGT) when a person disposes of qualifying business assets. To qualify for BADR on a disposal of shares in a trading company the shareholder must be an employee or officer of the company and, broadly, own at least 5% of the 'ordinary share capital' of the company. Shares which carry a right to a dividend at a fixed rate but no other right to share in the company's profits are not part of the 'ordinary share capital' for these purposes.
In Warshaw v HMRC, the Upper Tier Tribunal (UTT) agreed with the First Tier Tribunal that cumulative fixed-rate preference shares under which the fixed rate was also applied to the unpaid dividend (so the fixed-rate dividend compounded) were ordinary share capital for BADR.
The taxpayer, in this case, held shares that carried the right to a dividend at a fixed rate of 10% calculated on a compounding basis (on the sum of the subscription price and the aggregate of any unpaid dividends from previous years). Therefore, if profits were not available in a certain year or the dividend was not paid for any other reason, the fixed rate of 10% would be calculated on an increased amount in subsequent years. The taxpayer would only meet the 5% ownership requirement for BADR if these preference shares were taken into account.
The UTT held that for a right to a dividend to be at a fixed rate (and therefore, outside the definition of ordinary share capital) both the percentage rate and the amount to which the rate was applied must be fixed.
The inclusion of preference shares, which were thought not to be ordinary shares, in the ordinary share capital of a company could impact on other shareholders who do not hold preference shares reducing their percentage shareholding and possibly denying them BADR.
Are changes to capital gains tax (CGT) imminent? – Office of Tax Simplification review of CGT
The Office of Tax Simplification (OTS) has published the first of two reports on CGT following a request from the Chancellor for a review of the tax. Recommendations made in the first report - on the policy design and principles underpinning CGT – include:
- increasing CGT rates so they are more closely aligned with income tax rates - together with the re-introduction of a form of relief for inflationary gains (like indexation relief)
- removing the capital gains tax-free uplift on death where assets passing on death benefit from inheritance tax relief, and replacing it with a form of hold-over relief in other cases (so that the person inheriting an asset is treated as acquiring the asset at the historic base cost of the person who has died)
• abolishing or refocusing certain CGT reliefs including business asset disposal relief (formerly entrepreneurs’ relief).
There is currently considerable speculation over whether the Chancellor will announce tax rises in the Budget on 3 March 2021 with the 'hot favourites' being an increase in CGT rates to bring them more in-line with income tax rates, and an increase in the corporation tax rate to 20% or even 22%.
DAC6 - reporting obligations for UK intermediaries significantly reduced
Following the conclusion of a Free Trade Agreement between the UK and the EU DAC6 has ceased to apply in the UK. UK intermediaries (and taxpayers) are now only required to report details of cross-border arrangements to HMRC where those arrangements fall within Hallmarks D1 or D2 of DAC6:
- D1 - CRS avoidance arrangements - arrangements that may undermine the Common Reporting Standard or equivalent reporting requirements under agreements for the automatic exchange of information
- D2 - Obscuring beneficial ownership - arrangements involving a non-transparent legal or beneficial ownership chain where the ultimate beneficial owners are rendered ‘unidentifiable’ (to competent authorities)
These are the same arrangements that must be reported under the OECD's Mandatory Model Disclosure Rules (published in March 2018).
Of course, where another intermediary based in an EU member state is involved in arrangements that intermediary will still be required to report details of cross-border arrangements that fall within one of the other DAC6 hallmarks.
Stamp duty land tax – 2% surcharge for non-resident purchasers of UK residential property from 1 April 2021
From 1 April 2021, non-resident individuals, companies and trustees will pay a 2% stamp duty land tax (SDLT) surcharge on purchases of UK residential property interests for more than £40,000. The 2% surcharge will apply on top of existing SDLT rates - including the 3% surcharge for purchases of additional residential properties. The top standard rate of SDLT for properties valued at more than £1.5m will be 14%; the top higher rate (payable where the purchaser already owns a residential property anywhere in the world) for properties valued at more than £1.5m will be 17%.
Specific SDLT residence tests will apply for these purposes – for example, an individual purchaser will be UK resident if they are in the UK at midnight on 183 days or more during any 365 day period starting a year before the purchase and ending a year after it; otherwise the individual is non-resident for these purposes. The 2% surcharge will apply if any one of joint purchasers is non-resident, although it will not apply to a joint purchase by a married couple or civil partners (living together) one of whom is UK resident (under the SDLT resident test) but one of whom is non-resident (under the SDLT resident test). Special rules will apply to purchases by trustees.
