Copernicus was a thought leader. Way ahead of his time. He figured out that earth wasn’t the centre of the universe. He died in 1543. 21 years later Galileo was born and figured out Copernicus was right. He was ultimately placed under house arrest and forced to deny his beliefs under threat of torture.
Now I do have a big head. We all know this. I am not saying I deserve a place in history along with Copernicus and Galileo but something strange is happening in tax over the last year or two and it’s possible that HMRC are eventually catching up.
For many years now, since Osborne introduced s24 to restrict finance charges for landlords, there have been numerous weak schemes designed to relieve landlords of their money under the false promise of tax savings. These schemes have been unwinding over recent years with very serious consequences and many landlords and now facing life changing, and often business ending, liabilities to put things right.
I (yes I’m going for it!) like Copernicus and Galileo always thought that the simplified versions of property planning were spurious. This made life pretty hard because clients and prospects alike would regularly call or come to see me asking me to help them to incorporate their property businesses. I’d set out the steps costs and risks and be mocked for not keeping up with current “planning”.
Thankfully many people could be reasoned with. After all many people simply did not nee to incorporate as their issues had been exaggerated. Others were happy to incorporate in the correct way and accept some tax hits along the way. The majority however went elsewhere to chase the “no tax – no risk” models promised by firms that have now long disappeared leaving a trail of destruction.
I still see many instagrammers givings the worst of all tax planning advice and am basically powerless to do much about it. What is the terrible advice they are giving? It could be anything but one thing I would say is if their post starts with “never” or “always” then it is probably wrong. Why? Well tax is a subtle complex moving thing. Very few things are certain in taxes. I could almost go as far to say is “never” as simple rule that applies to everyone all of the time.
I mentioned HMRC. What are they up to then? Well hidden away beyond the bright lights of the budget speech was a note to say HMRC are reviewing a couple of things. One of them is the way clearances work when incorporating a business (including property businesses). Until now the main relief used has been applied automatically if you met the conditions. Under self assessment that means if you think it applies you simply claimed the relief on the tax returns and did not otherwise have to get HMRC to approve. Scheme providers held up these returns as “proof” that their models worked but the reality is that HMRC enquire in to very few returns and the lack of enquiry is far from them approving of what was done.
Now though HMRC have said that incorporation relief will no longer be automatic and must be applied for. This means they will look at every case. The “four properties” and “20 hours” “rules” that people are currently clinging to will start to crumble very quickly I suggest but there is something else in there worth looking at.
HMRC have just confirmed via freedom of information request that they are looking at the rules surrounding the transfer of liability on incorporation. This is especially relevant for landlords looking to incorporate as they have been told repeatedly over the years that you can transfer your properties to a company without having to tell the lenders with mortgages secured on the properties. In the early days I would say that was mortgage fraud or as a minimum a breach of lending conditions (remember they line that says if you sell or in any way reduce your interest in the property you will have to repay the mortgage?).
Latterly some lenders are happy to play along and will allow the charge to pass to the company quite easily but there are a lot of people out there that claimed incorporation relief without transferring the mortgages over. This could mean two things. First of all that none of the planning works and potentially serious capital gains tax charges are coming OR that the planning didn’t fail completely but that other tax charges are coming.
What should we do now then? From my end nothing has changed. Incorporate if it is the right thing to do but beware that HMRC will now want to look it over in much more detail than before. They rare not changing the rules around incorporation though, simply giving it the attention it deserves to protect the public purse.
Martin Wardle