Additional Dwelling Supplement – am I liable?

From April 2016, the purchase of a second home not only brought a liability to Land and Buildings Transaction Tax (“LBTT”) but also to Additional Dwelling Supplement (“ADS”) which is a levy of 4% of the property price where that price is in excess of £40,000. The original rate was 3% but the increase to 4% was brought in at the beginning of 2019.

A general misunderstanding is that ADS does not apply to the purchase of a main home. However, this is incorrect, and can still apply to the purchase of a main home where an individual owns another property, including an interest in another property. For example, if someone has inherited a property and subsequently goes on to buy their first home, ADS will be charged on that second property purchase. Ownership of another property includes a property abroad for ADS purposes and consideration therefore needs to be given to worldwide property ownership before understanding if an individual is liable to ADS. Despite the purpose of the ADS charge being to ‘protect and support opportunities for first-time buyers’ the spirit of this legislation is often lost by the tightly drawn legislation.

Where a main residence is being replaced and the replacement main home is acquired before the original property is sold, ADS will be charged. However, it is possible to have this refunded provided that the original main home is sold within 18 months of the acquisition date of the second property. It is worth noting that the Stamp Duty Land Tax (“SDLT”) rules south of the border are more generous and allow a 3 year period to sell the main home and obtain a refund.

Although the principle seems simple, there have been a number of cases over the past few months where Revenue Scotland have refused the refund and this has been upheld at Tribunal. Two of those cases (Dr Andrew Christie and Mr Elvis R A Mohammed) concern the same principle; both owned homes in the UK which had previously been their main residence but they had not lived in these properties for a number of years due to working abroad. Although they met the disposal timeline, the refunds were refused because the original properties were not lived in as main homes in the 18 months before acquisition of the second property.

In another case, the appellant (Dr Ewan H Crawford) had claimed a refund of ADS following the purchase of a home with his partner.  Both had their own homes prior to the second property purchase although neither had lived in each other’s home. Following the disposal of both of the original properties, a refund claim was made but this was refused on the basis that both individuals would have been required to live in both properties in order to qualify.

Other common areas of difficulty are often around separation and divorce or buying a property with a granny flat or holiday accommodation attached. Often, some planning in advance can reduce the exposure to ADS; for example in the latter case the ADS liability could have been reduced by the couple moving in together and the order of the property transactions being altered.

It is important that advice is sought in respect of ADS, particularly where it is not a straightforward main home replacement. If you have any queries or would like advice in this area, please contact Jill Walker or your usual AAB advisor.

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Extension of the Trust Registration Service

The Trust Registration Service (TRS) was introduced in June 2017 as part of the UK’s Money Laundering regulations.

The TRS requires trustees to report information about the trust, trustees, trust assets (for taxable trusts), beneficiaries and other parties associated with the trust to HMRC.  This information will then need to be kept updated for any changes (except for changes to the trust assets).

Previously, only trusts which paid certain taxes in the UK had to register, and all of these trusts should already have been registered on the TRS and have submitted updates where necessary (within 90 days of any changes, or an annual confirmation by 31 January if there have been no changes).

The requirement for trusts to register has now been significantly extended to cover all express trusts, both UK trusts and foreign trusts with certain UK links, regardless of whether they pay tax in the UK or not. Broadly speaking, an express trust is one created deliberately, either in someone’s lifetime or on their death. This extension mainly affects dormant and inactive trusts.

The deadline for registering these non-taxpaying trusts is on 1 September 2022 (or within 90 days of the creation for trusts created on or after 1 June 2022).

There are some exclusions from registration, but broadly most trusts with UK connections – including some non-exempt bare trust arrangements – will need to register on the TRS by 1 September 2022.

Trustees of UK trusts, or non-UK trusts with UK links, should ensure that they check the new rules and register if they are required to under the new rules.

Penalties will be charged for late registration of non-taxable trusts, although not immediately.  Once the 1 September 2022 deadline has passed, HMRC will write to trustees who haven’t registered and ask them to correct this.

Where a trust does not hold any cash and cannot pay, the responsibility for penalties may fall on the trustees or the settlor.

If you would like our help, or if you want to find out more information about the trusts which need to register and those which are currently exempt from registration, please contact your usual AAB Private Client team member or call 01224 625 111.

 

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Members Voluntary liquidation (MVL) v Strike Off – What is the difference?

Since moving into restructuring at AAB, friends and family have asked me:

‘What is an MVL?’

‘Is an MVL a bad thing?’

‘Why can’t owners just close businesses themselves?’

These are all very good questions! The restructuring and recovery team at AAB thought it would be beneficial to discuss the difference between an MVL and a strike off.

What is an MVL?

Firstly, an MVL is a Members Voluntary Liquidation. It’s a formal process entered into to wind up the affairs of a solvent company, meaning the company’s assets are greater than its liabilities, and it can pay debts as they fall due. The shareholders of the Company decide this route.

There may be several reasons for choosing this, such as retirement, a company being set up for a specific purpose and it’s come to the end of its life, or the restructuring of companies within groups.

All things come to an end, so if the time has come to close a solvent company then having peace of mind that the affairs are being handled by a professional, and the remaining assets are correctly distributed to the shareholders, I see this as a positive. I think the word “liquidation” is the reason there may be negative connotations.

It may be time to move onto a new venture, or walk off into the sunset of retirement, so how do you decide between striking off and an MVL?

What is a strike off?

A strike off is an informal way of closing a limited company. Typically, a Company Director deals with the close down and ensures all parties (including HMRC, creditors, employees and shareholders) are aware of the close down, all taxes are paid and filings/procedures are completed. A small fee is paid to apply to Companies House to strike off. Providing all information supplied is correct, the Company would be dissolved after two months.

Should you choose an MVL over a strike off for closure?

There are pros and cons of both processes.

Assets, tax efficiencies and peace of mind

When a business has more than £25,000 of assets to be distributed an MVL is normally the way to go.

A liquidator is appointed which ensures the affairs are wound up appropriately and any remaining liabilities are paid. The liquidator ensures assets are distributed in the correct way.

One of the main advantages is that the shareholders can get the benefit of tax efficiencies, as distributions can be treated on a Capital Gains Tax basis at a rate of 10%, if the shareholders qualify.

Assets can be distributed promptly following the appointment of a liquidator.  There’s also no limit on the amount of distributions in an MVL and the ability to make in specie distributions means that assets can be distributed directly rather than simply as cash.

In an MVL you get peace of mind that HMRC provide clearance, that acts as confirmation that there are no further taxes or returns due.  This means there’s minimal risk for directors since the liquidator deals with all aspects of the MVL.

Fees, time and tax clearance

Now for the disadvantages. There are fees to be paid to the liquidator to deal with the process (costs will depend on the amount and complexity of assets/issues to be dealt with).  The process may take longer than a strike off and requires HMRC approval prior to dissolution.

A strike off can be a quick process and is also very cost-effective (£10 to apply to strike off).

However, there are also down sides. HMRC or other creditors can object to the process. £25k limit applies for any distribution to be under Capital Gains Tax (CGT) rules. If it’s above this amount, then the full distribution will be treated as income and taxed as such.

Unlike MVL’s, HMRC don’t always give tax clearance on strike offs. Once dissolved, any remaining assets would transfer to the Crown.

Hopefully, that helps a little in explaining the difference between the two processes.

Summary

Striking Off is better for: MVL is better for:
Companies with less than £25k remaining. Companies with over £25k held or needing assets distributed directly to shareholders.
Companies with no or minimal creditors/tax matters to be resolved. Tax efficiencies for shareholders.
Quick dissolution of Company, without need of Liquidator. Peace of mind.
Receiving HMRC clearance.

If you would like further information about MVL’s, strike offs or other restructuring projects, please don’t hesitate to contact Claire Smith or any member of our Restructuring and Recovery team.

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