Private Client Law
April 2015 Taxing times
I am now studying for the fourth and final of my STEP exams, which is on the tricky topic of tax. I have spent considerable time in the process of getting to grips with the extraordinary quantity and complexity of the tax rules, thinking (and ranting) about how it can possibly be cost-effective for HMRC officers to have to deal with such a seemingly endless raft of regulations. Tax law clearly grows haphazardly as successive governments add yet another layer of rules on top of the existing structure, with a view to furthering their political aims. The result of this is that a term can mean one thing for one tax (say capital gains tax) and something completely different for another (such as inheritance tax).
I would like to share some of my favourite tax laws with you. I have learnt that a capital gain on the sale of a space shuttle can be ‘rolled over’ to the purchaser. (A useful regulation for day-to-day practice). Also that bagpipes and deer skins qualify as ‘plant and machinery’ for the purposes of business property relief. Agricultural property relief is not available on a gift of oyster beds. Helpful stuff.
The tests for what counts as a farmhouse for the purposes of agricultural relief are particularly intelligent. The first is the “elephant test”. This test assumes that, whilst it is difficult to define what a farmhouse is, you will know one when you see one. This is different from the “man on the rural omnibus” test, which is whether the man on the passing country bus would consider the farmhouse to be a farmhouse.
Some of the tax laws seem to have been designed purely to try to trap those who have not previously come across that particular rule. For example, say you are choosing to pay inheritance tax by instalments (which is possible on land and unquoted shares but not on other assets). Should you pay more than the amount due under the instalment, the balance of the whole tax bill instantly becomes due. Quite why it should be helpful for HMRC to design the rules so that no additional payment is held by them (and earning interest for them) rather than by the taxpayer is, like much of the law of tax, not clear, and not entirely logical.
The course has however highlighted some more useful aspects of tax law to me. In particular I have a new appreciation for the opportunities for tax-planning which are available in the course of the administration of a deceased estate. For example, where an asset (say a portfolio of investments) is to be sold in the course of the administration, the sale can be made by the executors, or by one or more of the beneficiaries of the estate. The beneficiaries may have losses which can be set against any gains, and they may also have part of their ‘basic rate band’ available, so that some or all of the gain may be taxed at 18 % (rather than 28 % which is the rate applied to the gains of an estate). However, the availability of annual exemptions (of both the beneficiaries and the estate) must also be considered. There are therefore a number of different options which must be carefully thought through to ensure that the tax bill is as small as possible.
As always, taking advice from an expert is crucial, to ensure that any opportunities for tax mitigation are not overlooked.