It is very tax efficient for a person from Europe, Far East or Middle East to invest in either residential or commercial property in the UK. Despite the perceived austerity programme administered by the UK Coalition Government property prices have held up well in the UK particularly London. Rental yields are strong and borrowing costs are low. Properties held in the UK including holiday lets is treated as a property owning business with attractive tax deductible reliefs to write off against rental income.

A UK non-resident can apply to HMRC under the Non-residents Landlord Scheme (NRLS) to avoid a tenant and/or managing agent withholding UK tax at the rate of 20% from the gross rental income. Under the NRLS an owner of property(ies) agrees to file an annual self assessment tax return. The landlord can claim deduction for expenses in managing the property owning business.

These include:

• Loan interest costs
• 10% Wear and Tear Allowance for furnished lettings
• Management Agent fees
• Repairs and Maintenance
• Energy (green) saving measures
• Equipment in communal parts of a building

If a person is concerned about UK inheritance tax there are more viable property owning structures through the use of say, a Channel Islands property holding structures. For Middle East investors it is also possible to construct a property portfolio which is complies with Islamic rules on investment. Many banks in the UK offer Islamic finance.

In respect of commercial property it is possible to claim tax depreciation on investment in plant and machinery and certain fixed items to a building.

A non-resident landlord is not subject to UK capital gains tax (CGT) on any gain on disposal of UK property. Given that the typical return from most properties comprises 50%+ in capital growth this makes it an attractive post tax investment.

It is noticeable from the forthcoming Olympic games in London that rental yields are on the increase. However, there is a perception that after the games have finished there will be a collapse in the market due to over supply of rental accommodation.

This could be a good time to buy up London property for long term growth. Also many investors looking to let their property in the Olympic games have possibly overlooked the point that they are conducting a holiday letting business which have additional attractive tax reliefs.

On May 10th the European Court of Justice (ECJ) delivered a favourable ruling in respect of investment funds on French withholding tax. The case against France was brought by German, Spanish Belgian and US investors. They argued that the French rules which taxed dividends paid on French equities to non resident investment funds but exempted when paid to French funds was contrary to EU law. Funds invested in French equities should now consider reclaiming French withholding tax paid from 1 January 2009. This could have implications for other markets in the EU and investors should consider making protective claims

The ECJ ruling confirms:

1. The French rules are a restriction on free movement of capital between EU member states and third countries; and
2. There is no justification for France applying such discrimination in either an EU or third country context;

Informed sources comment that this will be a massive hit to the French economy as claims for refunds of French withholding tax is estimated to be in excess of euros 4 billion.

Francois Hollande has just become president of France. One of his first reported tasks is to scrap tax breaks for the so called wealthy and high earners and introduce a top rate of tax of 75%. This brings about a particularly interesting twist following Budget 2012 in the UK; it may be more tax efficient for such super rich French residents to move to the UK where the top marginal rate of income tax is projected to be 45% for the year 2012-2013 and the top marginal rate of capital gains tax is 28%. The UK has become a safe harbour for overseas residents to take advantage of our tax breaks despite some Media comment to the contrary and investment in UK property and assets is both tax efficient and protects against the volatility of the Euro and other currencies.

If a French resident were to come to the UK to work for as period of two years he would normally be treated as resident but not ordinarily resident for UK tax purposes. This means such an individual would only have to pay UK on his proportionate share of UK earnings effectively reducing the top marginal UK tax rate of 45% to say, 22.5% to 30%.

Non-UK domiciled but resident individuals in the UK are subject to a more beneficial tax regime than throughout the rest of Europe. In particular an individual taxpayer can elect to be taxed on the remittance basis. This means that only UK tax is paid on income and gains remitted to the UK. In the earlier years of UK residence such individuals would not have to pay the “penalty kick” charge of £30,000 or £50,000 for the restricting UK tax paid to remittances.

Non-UK residents are only pay UK tax on net rental income in investment property. They do not pay capital gains tax on disposal. In Budget 2012 the Chancellor introduced lower rates of corporation tax on company profits which also means the UK is a good headquarters place to centre overseas operations into Europe and the Far East including China. The rate of corporation tax is projected to reduce to 24% for the year ended 31 March 2013 and smaller companies only pay 20%.

HMRC’s campaigns are designed to tackle tax evasion by encouraging people with undeclared income to bring their tax affairs up to date. This year they have launched a campaign against Electricians and electrical fitters. The Electricians’ Tax Safe Plan is aimed at anyone who installs, maintains and tests electrical systems equipment and appliances. The deadline to use this facility is 15 May 2012 and make arrangements to pay tax owed by 14 August 2012 will only face a 10% penalty instead of the normal 20%.

E marketplaces
HMRC have just launched a new campaign to raise more tax for the year 2010-2011 from individuals who sell on sites like eBay and Gumtree. Over the last few months it is understood that HMRC has been busily identifying those individuals who use Internet sites to advertise and sell goods or services. HMRC is offering such individuals whose activity amounts to trading to contact them by June 14 2012 to avoid harsher penalties arising on a subsequent enquiry. People who commenced trading in 2011-1012 have until 5 October 2012 to notify HMRC without and penalties applying. However, if your profits exceeded the NI lower earnings limit of £102 per week you will have had a shorter deadline to report activity to HMRC.

What amounts to trading?

• It does not apply to items bought for personal use which one decides to sell on at a later date
• However, if you frequently sell items with the intention of making a profit

There are plans to add three more campaigns:

• Missing Tax Returns: Focusing on people who have higher rate tax to pay on their income but have not declared this to HMRC;
• Home improvement trades: focusing on tradespeople in construction and building such as roofing, window fitting, bricklaying and carpentry and joinery; and
• Profits or commission arising on direct selling

On 20 March 2012 the UK and Switzerland tightened the terms of the tax cooperation agreement by introducing higher penalties. It is aimed at individuals hiding assets in Swiss bank accounts.

Last year the Chancellor announced a crackdown on Swiss assets by entering into the UK-Switzerland tax agreement which was signed on 6 October 2011 and expected to come into force in January 2013. It gives UK individuals an opportunity to bring their tax affairs up to date if they have accounts in Switzerland for which they have not declared income and gains to the UK tax authorities. Under the agreement account holders will be asked by the Swiss Government whether they have paid the correct level of tax to HM Revenue & Customs.

If they declare they have not, they will face a one-off penalty to regularise their affairs without having to reveal their identities. Such individuals can clear their arrears and keep their anonymity by making a one-off payment which will be deducted by the relevant Swiss bank from the balance in the account in 2013 (when the agreement comes into force) and passed over to the UK authorities.

Alternatively, the individual can disclose the account to the UK authorities, in which case the tax liability is calculated in the usual way and the taxpayer must pay the arrears plus interest and penalties.

Once the agreement is in force and the initial payment made, taxpayers can either make an annual disclosure or pay an annual withholding tax.

The changes announced on 20 March 2012 amends the October 2011 agreement and have raised the minimum penalty from 19% to 21% of the amount of tax owed and increased the maximum penalty from 34% to 41% of the amount of tax owed. The level of penalty will depend on how long the account has been held. Individuals will then pay an annual withholding tax of 48% on income. Capital gains tax will be 27% and dividends will be taxed at the rate of 40%. The announcement also clarifies:

• The relationship between the above Agreement and the EU Savings Agreement (EUSA) with Switzerland. Where a relevant person has suffered withholding tax under the EUSA, an additional 13% ‘tax finality payment’ will need to be paid to obtain tax clearance under the terms of the Agreement. This achieves the same effect as the 48% withholding tax levied under the original terms of the Agreement
• Introduces a new inheritance tax levy on the death of the relevant person unless their personal representatives authorise the Swiss bank to disclose the account details to the UK

The necessary legislation to give effect to the changes will be in Finance Bill 2012.

I quote an example from HMRC:

Mrs A’s tax return is due on 31 January 2013 but HMRC doesn’t receive it until 5 August 2013.
It is over six months late so she will have to pay all of the following:

• £100 fixed penalty
• £900 penalty – this is £10 each day from 1 May to 29 July, when the maximum 90 day penalty is reached
• £300 or 5 per cent of the tax due – whichever is the higher

You may think you have a reasonable excuse for sending your tax return late. You can find out more about reasonable excuses in the HMRC ‘How to appeal‘ article. You don’t need to wait until you get a penalty, you should let HMRC know as soon as you can.

There is more detail in our earlier post Income Tax Self Assessment (ITSA) Penalties

An e-marketplace is an online market, or online shop, where buyers and sellers trade with each other over the internet. They might buy and sell goods or services, or a combination of both.

A separate company, a ‘third party’, runs most e-marketplace websites. They let you advertise or auction your goods or services on their website, and usually charge you a fee for this service – either for using their site, the amount you sell your goods or services for, or both.

To help taxpayers on an e-marketplace pay the correct amount of tax HMRC have introduced the “e-markets disclosure facility (e-MDF)”

To take advantage of this campaign you must:

1. Notify HMRC of your intention to take part in the campaign by 14 June 2012
2. This is a simple process and can be done online, by phone or by post
3. At this stage you only need tell HMRC that you will be making a disclosure
4. Once you have done this, you must make your disclosure and pay what you owe by 14 September 2012

If you take part in this campaign and tell HMRC about any income that you have not previously disclosed:

1. you may only have to pay for a maximum of six tax years
2. you can tell HMRC how much penalty you should pay
3. you may be able to pay what you owe by installments

It is basically a ‘fresh start’. You can stop worrying about what might happen when HMRC find out that you have not been telling them about all of your income. It is a chance to start getting things right from now on, whilst knowing exactly how much it’s going to cost to sort out things for earlier years.

HMRC announced on 26 April 2012 that it has been working with the commercial software industry to provide simple mobile record keeping applications (apps) for small businesses and the self-employed who are below the current VAT threshold of £77,000.

These applications may help a taxpayer with maintaining good records and include links to HMRC guidance related to record keeping that they may find useful. It is understood that the majority of these applications are free.

The first of these apps from the IT software providers is now available and the list can be obtained from HMRC website.

In Budget 2012 the Chancellor announced plans, following an exercise carried out the Office for Tax Simplification (OTS), to simplify the taxation base for small businesses by adopting a cash basis. The OTS has reviewed how tax rules could be simplified for such businesses and on 27th March 2012 the Government issued a Consultation Document on elements of that review and is thinking of making the turnover threshold below the VAT registration limit of £77,000 as the benchmark for being able to adopt the new rules. The new regime would take effect from April 2013. It is also looking at extending the basis for businesses that initially qualify up to a turnover of £150,000.

The Government wants to make it easier for the self-employed sole trader or those in partnership with other individuals to calculate their taxable income, as well as providing them with more certainty over their tax affairs.

The proposals are that small businesses will be taxed on the basis of cash passing through their books, rather than being asked to spend their time doing calculations on a so called accruals basis designed for larger businesses. They also include measures to simplify arrangements for some business expenses including a table of flat-rate expense deductions for using say, their household gas and electricity. The new system will work on a cash in (when you receive it), cash out (when you pay out) basis.

Many landlords and their advisors face difficult decisions on what repair and improvement expenditure on UK property can qualify for tax relief when they have to file their UK self assessment tax returns. We set down below a few areas which landlords can explore.

Energy- Savings

A taxpayer is entitled to claim 100% First Year Allowances (tax depreciation) under the Capital Allowances Act 2001 for energy saving equipment as a revenue expense on items such as:

• Boiler equipment – gas fired condensing water heaters
• Lighting – white light emitting diode lighting units
• Pipe work installation

In addition a taxpayer can claim an income tax deduction for expenses up to £1,500 per property (note not now per building) let in a rental business for expenditure incurred on energy savings items. This rule applies for expenditure incurred after 6 April 2007 and includes the following items:

• Loft and cavity wall installation (solid wall insulation)
• Draught proofing
• Hot water system insulation
• Installation of floor insulation
• Lagging cold water pipes

Maintenance and repairs

For maintenance, repairs and improvement expenditure on a property to be allowable as revenue expense it must be for work carried out:

• To preserve the value of the property, but excluding work which constitutes an addition or an improvement
• where you can demonstrate that improvements are an inherent part of the repairs and maintenance;
• where an exact replacement of the part property cannot be made;

to obviate necessary repairs. In this case you would claim that part of the improvement cost as a revenue expense equal to the amount one has in effect saved on not carrying out necessary repairs; and

• to conform to a statutory requirement

Commercial Buildings and Communal Parts

A landlord may be able to claim an annual investment allowance on plant and machinery used for the purposes of a property rental business.