Navigating the removal of the Bankers Bonus cap: A fine line for banks to tread

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The removal of the bonus cap last October 2023 marks a significant shift in the UK banking sector, presenting both opportunities and challenges for banks as employers. This policy change is poised to enhance London’s competitiveness on the global stage, aligning remuneration packages with those offered in major financial hubs such as New York and Tokyo. However, it also brings a host of employment law considerations that banks must navigate carefully.

Barclays was the first UK bank to axe the bonus cap, following the lead taken earlier this year by Goldman Sachs, JP Morgan and most recently Citi, with more UK banks expected to follow suit. In a recent article for The Banker, Head of Employment and Partnerships, Jo Keddie shared some brief insights for the banking sector, warning of the fine line to tread to ensure changes are implemented in a fair and compliant way.

In this article Jo provides a more comprehensive overview of the employment issues banks need to consider when removing the bonus cap, to ensure they don’t get caught out.

Enhancing Competitiveness and Talent Retention

One of the primary benefits of scrapping the bonus cap is the ability to offer more competitive remuneration packages in London and other banking hubs in the UK. We expect that it will help the City attract and retain top talent, as strong performers seek financial recognition for their contributions. With fewer restrictions on bonus amounts, London can now compete more effectively with other global banking centres, potentially drawing business back to the City from other European banking hubs.

The removal of the cap is likely to facilitate greater labour mobility. International banks can now transfer employees to UK-based roles without financial detriment, enhancing the UK’s appeal as a destination for top banking talent. Importantly, safeguards such as variable pay with deferral, malus, and clawback provisions remain in place to mitigate excessive risk-taking as the new changes come into effect across a growing number of banks in the UK.

How to fairly adjust remuneration packages

Historically, banks responded to the cap by raising base pay levels and introducing role-based allowances. With the cap’s removal, banks face the challenge of adjusting remuneration policies to allow for increased bonuses on top of already high salaries. This may involve phasing out role-based allowances in favour of a more flexible pay structure.

With these changes comes the potential for an increase in discrimination claims as employees. With “star performers” pressing for significantly increased bonuses, there is inevitably going to be others at various levels who have felt undervalued also pressing for larger bonuses and using the changes to secure better overall packages. When facing these pressures, banks are at risk of creating a two-tier workforce, with disparities between new hires and existing employees potentially leading to disharmony and resentment.

Contractual and Legal Considerations

Reducing fixed salaries to accommodate higher bonuses presents contractual and legal challenges. Banks must consult employees and ensure that the overall package is attractive to gain consent for pay reductions. Imposing changes without consent could lead to breach of contract and constructive dismissal claims.
To avoid contract claims, banks must ensure that discretionary bonus decisions are lawful, rational, and consistent. Building mechanisms into bonus policies that assess factors and KPIs rationally and reasonably is crucial. Failure to do so could result in costly and reputationally damaging claims.

Moving forward, bankers will be closely scrutinising how any discretionary elements (as opposed to more formulaic criteria) is being exercised in respect of their annual bonus. The case law we regularly relied on when examining the exercise of discretion, may well be revisited when determining whether discretion has been exercised reasonably with regard to all the circumstances or whether, instead, it was perverse and cannot be justified.

Failure to build in mechanisms to minimise these risks could well result in contract claims that are likely, due to the size of the claim, to be tested in the High Court. This inevitably is reputationally damaging, costly and is not a good use of management time. From experience, it also causes friction and morale issues internally amongst the affected workforce.

Addressing Discrimination and Equal Pay

Ensuring fairness in bonus distribution is crucial to avoid discrimination claims. Banks must justify any discrepancies in bonuses and ensure that changes to pay structures are not discriminatory. Historically, gender pay gaps in bonuses have been larger than in fixed pay, necessitating careful consideration of any changes to remuneration ratios.

Discrimination claims could arise if changes to remuneration and bonuses are perceived to be linked to protected characteristics such as age, sex, race, or religion. Such claims would be heard in Employment Tribunals, where substantial compensation and injury to feelings awards can be granted.

Trying to get the bonus ratios “right” for the different roles across banks will be important as will the need to try and justify different bonuses for different roles. For example, banks could set different ratios for different categories of employee and should then apply those ratios “equally” i.e. fairly to their employees doing the same work regardless of sex or other characteristics.

Reputational Risks

Mishandling the removal of the bonus cap could lead to reputational damage and costly claims. Banks must tread carefully, offering competitive bonus structures while ensuring fairness and legal compliance. Internal processes such as grievances should be followed to address perceived unfairness and imbalance. Remuneration policies must be carefully drafted and approved to maintain a competitive edge.

Conclusion

The removal of the bonus cap presents significant opportunities for the UK banking sector to enhance competitiveness and attract top talent. However, banks must navigate a complex landscape of employment law to implement these changes effectively. By ensuring fairness, legal compliance, and careful consideration of employee concerns, banks can successfully transition to a more flexible and competitive remuneration structure.

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Building Blocks of Tax – Elizabeth Small writes for Taxation

In an article for Taxation Magazine, Corporate Tax Partner, Elizabeth Small considers the recent Supreme Court decision in Centrica Overseas Holdings Ltd v HMRC [2024] UKSC 25.

Centrica (the company which owns British Gas) argued that the fees charged by its professional advisors on the sale of one of its assets was a management expense and should be deemed to be a revenue expense and therefore deductible from their corporation tax bill. The Supreme Court unanimously dismissed Centrica’s appeal and held that the expenditure was capital in nature and could not be deducted.

In the article, Elizabeth looks at the facts of the case and discusses why being able to differentiate between capital and revenue expenditure is a fundamental part of the UK tax and in this case, a holding investment company’s ability to deduct deal fees. With reference to the Supreme Court judgement the article considers the three legal tests which help determine whether something is revenue or capital in nature and sets out the principles which the court applied to reach its decision, and how early in the process the advisory fees may become costs of disposal.

Read the full article here.

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The Lifecycle of a Business – An Introduction to Incentive Arrangements and their Associated Tax Treatment

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Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, such as, set up, directors, funding and shareholder-related matters, but now let’s concentrate on “Employment: 9 to 5”.

An Introduction to Incentive Arrangements and their Associated Tax Treatment

In this article, we briefly outline some of the common types of share and cash incentives provided to directors/employees, and their associated tax treatment. Such incentives are a great way for businesses to attract and retain talent, ensuring that employees are rewarded in a way which aligns with the interests of a business more generally. In essence, they allow an employee to benefit from the growth in value of a business.

References to employees in this article include directors.

Issue of shares

Employees can be issued shares in a business. This gives an employee real ownership in a business straightaway (rather than an option to buy later), often with certain voting rights and the right to dividends. Such shares can be gifted or purchased by an employee.

Income tax will normally be due from the employee to the extent that the employee pays less than the market value of the shares that are issued to them. However, if the shares are subject to forfeiture provisions which last for no more than five years, a different tax treatment can apply.

A number of elections can also be made which will alter the tax treatment in some circumstances.

Enterprise Management Incentive (EMI) share option scheme

EMI schemes can be a very tax efficient way to incentivise staff, especially where a company has the potential for growth. Under the HMRC approved EMI share option scheme, employees can be granted options over shares (i.e. the right to acquire them at a certain price in the future) having a maximum value (at the date of grant) of £250,000. As with all option plans, the hope is that the value of the shares is worth more than the pre-agreed price at the time they are acquired.

EMI schemes can also include conditionality and time frames; companies can, for example, set performance or length of service milestones which need to be met before EMI options vest.

However, although EMI options benefit from favourable tax treatment, the company in question must be carrying on a “qualifying trade” and so it is not always possible to grant EMI options; for example, the business of owning and operating hotels is not a qualifying trade for EMI purposes.

CSOP share option scheme

Another form of HMRC approved share option scheme is the CSOP, under which an employee can be granted options over shares having a value (at the date of grant) of up to £60,000.

Unlike the EMI scheme, it is not necessary for the company to be carrying on a qualifying trade and, provided that the option is exercised, broadly, no earlier than three years from the time that the option is granted, the employee will not be subject to income tax on either the grant or exercise of the option. (Note that in some situations, it is possible for the option to be exercised earlier, for example, if the company is subject to a successful takeover.) Instead, the employee will be subject to capital gains tax (CGT) on the difference between the price paid on exercise and the market value of the shares when sold. At present CGT is payable at a much lower rate than income tax so this is a significant advantage of exercising a CSOP option.

Since CSOPs must comply with a number of HMRC conditions, it is necessary to ensure that these conditions are, and will continue to be, satisfied. In addition, given that the options have to be granted at a price equal to the current market value of the shares when the option is granted, a CSOP scheme will only act as a successful incentive if the share price increases after the date of grant.

Unapproved share option schemes

As the name suggests, unapproved share option schemes are not approved by HMRC and therefore the drafting of the scheme rules can be flexible. However, although income tax is not payable when the option is granted, on the exercise of the option the employee will be subject to income tax on the difference between the price paid on exercise and the value of the shares at that point.

If the shares are tradeable at the point of exercise (for example, because the exercise is triggered by an exit event such as a takeover) employer and employee national insurance contributions (NICs) will also be due.

Phantom share scheme

Under a phantom share scheme, the employee does not hold shares or a share option, but the economic effect is to track the performance of the shares as if the employee held shares or an option over shares.

Since the employee will only ever receive cash, the proceeds under a phantom share scheme are treated in the same way as other remuneration and so are subject to income tax and to employer’s and employee’s NICs.

Cash bonus scheme

A cash bonus scheme is treated in the same way as if the employee had received a salary and so the amount received under the scheme will be subject to income tax deducted under the PAYE scheme and also to employer’s and employee’s NICs.

What happens when an employee leaves?

With all incentive plans, companies should think about what happens to a participant’s interest once their employment comes to an end. It is important that this is made clear in any scheme documentation to avoid any later dispute. Typically, schemes will have a concept of “good” and “bad” leaver. “Good” leavers are normally those who leave due to no fault of their own (such as ill health or where they have been made redundant) and will often retain some of their interest (subject to any specific HMRC restrictions) – this could be all of it or only that which has vested before their employment ends. “Bad” leavers (such as those whose employment is terminated for cause) will often forfeit all of their entitlements.

If you would like to discuss any of the points raised in this article or incentive arrangements in any more detail, please get in touch with your usual Forsters’ contact or a member of the Forsters’ Corporate Tax team or Employment and Partnerships team.

Disclaimer

This note reflects the law as at 30 April 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice. In particular, incentive arrangements and their tax treatment are complex. This note provides a brief summary of the key points only.

Elizabeth Small quoted in The Times on the abolition of Multiple Dwellings Relief

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Tax Partner, Elizabeth Small, has been quoted alongside other industry experts in The Times’ Bricks & Mortar on the upcoming proposed abolition of multiple dwellings relief (MDR).

The article ‘Want a house with an annexe?’ delves into what the announcement means for country houses. Since 2011, MDR has made country houses with annexes, cottages and converted outbuildings more appealing and affordable for buyers as it reduced the amount of Stamp Duty Land Tax (“SDLT”) payable.

MDR differs from the usual Stamp Duty Land Tax (“SDLT”) treatment by averaging the SDLT due across the number of properties that are being bought. Therefore, instead of paying tax on the total purchase price, the tax is calculated on the lower average. As SDLT rates increase as the property price rises, MDR can produce a lower SDLT liability. The MDR is subject to a minimum rate of 1% of the purchase price.

But what is considered an additional dwelling? Elizabeth explains that it is generally considered to be “somewhere where the occupant can shelter behind their lockable front door and be able to live in reasonable comfort, so with cooking and separate bathroom facilities and windows”.

The full article can be read here. Behind a paywall.

From 1 June 2024, property transactions that have not completed will no longer qualify for MDR. If you have concerns or further questions on this topic, please contact Elizabeth Small.

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Anson Revisited: What does HMRC’s updated guidance mean for UK resident members of US LLCs?

The US and the UK are separated by the vast and tumultuous waters of the Atlantic Ocean. Those with connections to both countries will often find themselves rowing against the tide between two very different and complex regimes. With the right specialist advice, they can navigate the cross-border challenges safely and make the best use of planning opportunities.

Understand the issues, avoid the traps, and discover ways to plan ahead in our Navigating the Atlantic series for US-connected clients.

UK Tax Treatment for Members of US LLCS

In this instalment, we explore the impact of HMRC’s recently updated guidance on the UK tax treatment of US LLCs and why planning ahead is more important than ever to avoid double taxation.


Moving to the UK


Introduction

On 12 December 2023 HMRC published updated guidance (issued in International Manual 180050, see also 161040) on the UK tax treatment of profits arising within a limited liability company (an “LLC”) incorporated in the US. The guidance indicates that taxpayers will face an uphill struggle if they now wish to claim double tax relief on the basis of the decision of the United Kingdom’s Supreme Court in Anson v HMRC [2015] UKSC 44 (“Anson”).

Background

In Anson, the taxpayer (Mr Anson), who was UK resident, was a member of a Delaware incorporated LLC. The profits of the LLC were apportioned between and distributed each quarter to its members. The LLC was classified as a partnership for US tax purposes and was, therefore, transparent for US federal and state tax purposes: Mr Anson (and not the LLC) was liable to US tax on his share of the profits as they arose.

HMRC sought to charge Mr Anson to UK income tax on the profits he received from the LLC (i.e. on the distributions) and argued that the profits that had been taxed in the US were the profits of the LLC and not of Mr Anson. On that basis, they argued that Mr Anson was not entitled to the benefit of the US/UK double tax treaty because the US tax and the UK tax were not payable on the same profits.

The First-tier tribunal (“the FTT”) found in Mr Anson’s favour, finding as fact that under Delaware law the profits of the LLC belonged to the members and not to the LLC. The case ultimately reached the Supreme Court, which also found in favour of Mr Anson by virtue of the FTT’s finding of fact: if Mr Anson’s share of the profits belonged to him under Delaware law, the distribution of his profits to him represented the mechanics by which he received the profits to which he was entitled and did not represent a separate profit source. As both US and UK tax arose on the same profits, Mr Anson was able to benefit from relief under the US/UK double tax treaty.

HMRC’s Initial Guidance Relating to Anson Published On 25 September 2015

Shortly after the Supreme Court’s decision in Anson, HMRC published guidance in which they stated that “HMRC has after careful consideration concluded that the decision is specific to the facts found in the case…Individuals claiming double tax relief and relying on the Anson v HMRC decision will be considered on a case by case basis.”

Perhaps tellingly HMRC also said that “where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business”. HMRC’s guidance reassured the corporate community that group relief would continue to be available where US LLCs were part of the group structure.

Although not particularly helpful, this guidance suggested that HMRC conceded that where the facts of a case and those found in Anson were alike, the profits of an LLC should be treated as belonging to its members such that double taxation relief would be available.

HMRC’s Guidance Published in December 2023

However, it appears from the latest guidance that HMRC has decided to take a more robust approach. In INTM180050 HMRC now state: “Based on HMRC’s understanding of Delaware LLC law (as at 06 December 2023), and contrary to the conclusion reached by the FTT in HMRC v Anson…HMRC continue to believe that the profits of an LLC will generally belong to the LLC in the first instance and that members will generally not be treated as “receiving or entitled to the profits”of an LLC.”

HMRC go on to say that it understands that the LLC law of the other US states is largely the same as that of Delaware so that it would generally not regard the profits of other US LLCs as belonging as they arise to the members.

From HMRC’s perspective it follows that individual members will only be chargeable to UK tax on any dividends or other distributions that they receive from the LLC (a consequence of HMRC continuing to regard LLCs as being ‘opaque’ for UK tax purposes), and that such receipts will be taxed at the dividend rate of income tax (currently up to 39.35%). If the LLC is taxed as a partnership in the US, HMRC warns that in its view no relief is available under the treaty because it believes the same income is not being taxed in both jurisdictions.

Based on HMRC’s 2015 guidance taxpayers with similar facts to Anson were claiming treaty relief but in its new guidance HMRC say that where a taxpayer has claimed such relief, “HMRC will consider opening an enquiry or making a discovery assessment in accordance with its normal riskbased approach.”

Implications of HMRC’s Updated Guidance

For UK resident individuals who are members of US LLCs, the significance of the latest guidance is that HMRC is putting the taxpayer on notice that it disagrees with the FTT’s finding of fact in respect of Delaware law; as this finding underpinned the Supreme Court’s decision that Mr Anson could claim double tax relief, HMRC are now asserting that taxpayers with similar facts to Anson cannot rely on that decision to claim such relief.

Whilst the FTT’s finding in relation to Delaware law is treated as a finding of fact and therefore does not set a binding precedent for future cases, the Supreme Court considered that the FTT was entitled to make its findings about the interaction between Delaware legislation and the LLC’s operating agreement (it is generally understood that the LLC in Anson was not unusual). Further, as HMRC’s revised position is not based on new law but merely disagreement with the decision in Anson, it remains open for taxpayers to continue to file on the basis of Anson (with appropriate disclosure in the tax return).

What Planning Options are there Beyond Relying on Anson?

The latest guidance indicates that HMRC are likely to push back on any attempt by a taxpayer simply to rely on Anson and may intend to re-litigate the point (albeit largely running the same arguments). HMRC may or may not win on any re-run of the Anson litigation. However, unless a taxpayer is determined to fight the point, if possible, we would suggest that it would be more time and cost effective for a taxpayer to structure their affairs so as to avoid the risk of double taxation. For example, to the extent possible, taxpayers could:

  • structure their investments/ business interests through an entity that is treated as being either transparent or opaque in both the US and the UK; or
  • if they are able to do so, claim the remittance basis of taxation and not remit any income from the LLC.

Conclusion

There is a certain policy logic for HMRC’s revised guidance which doubles down on its view that US LLCs should generally be treated as ‘opaque’ (often the desired treatment from a UK corporation tax perspective); HMRC’s position enables it to adopt a more uniform approach that, in practice, does not require it to review the relevant state legislation and an LLC’s operating agreement in every case.

However, it is an unsatisfactory outcome for individual taxpayers, particularly for those who want to receive their distributions in the UK and who justifiably wish to rely on the Supreme Court decision to benefit from treaty relief but do not want to incur the expense of challenging HMRC’s updated view. Taxpayers who want certainty of treatment may have to either accept an unpalatable double tax cost or see if they can structure or restructure their affairs accordingly.

Disclaimer

The members of our US/UK team are admitted to practise in England and Wales and cannot advise on foreign law. Comments made in this article relating to US tax and legal matters reflect the authors’ understanding of the US position, based on experience of advising on US-connected matters. The circumstances of each case vary, and this article should not be relied upon in place of specific legal advice.

This article has also been published in ePrivateClient, which can be found here.

Making your gift go further – Elizabeth Small and Oliver Claridge write for Taxation

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Gift aid exists to encourage individuals (which includes partnerships and sole traders) to make charitable donations.

Many taxpayers give to charity (or community amateur sports clubs, which also qualify for gift aid) from a purely altruistic perspective, but by properly utilising gift aid they can make their gift go further…

Elizabeth Small and Oliver Claridge consider how gift aid can make a charitable gift go further while also providing an element of relief to the giver – and even potentially restoring a higher-rate taxpayer’s personal allowance.

Read the full article here.

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Tax Efficiency and Care Homes: A Guide to Capital Allowances

The centre piece of the Autumn Statement was on full expensing policy. Initially introduced on a temporary basis in the Spring Budget of 2023, the policy was made permanent in the Autumn Statement.

Full Expensing allows companies subject to UK corporation tax to secure a 100% allowance when purchasing qualifying plant and machinery which is new and unused. It is a tax saving measure for many companies because the entire expenditure on the plant and machinery can be fully deducted from the company’s corporation tax bill. Notably, there is no upper limit on the cost of the eligible plant or machinery – so the more a company invests in equipment, the more it can deduct from its corporation tax liability.

For items which do not qualify for a 100% allowance, a 50% first-year allowance is available for expenditure on new special rate (including long life) assets, some of which are listed below.

However, businesses should beware that the Treasury will recoup the saving if the company disposes of the asset. For instance, if a company purchases a new item of machinery and deducts 100% of the cost from its corporation tax bill, and subsequently sells the asset for £20,000, it is obliged to incorporate £20,000 back into its taxable profits.

In our experience, full expensing, and other available capital allowance claims for care homes are frequently underestimated. This leads to businesses missing out on significant tax savings.

In this piece we consider how full expensing, and 50% first year capital allowance, can be used in the care home setting and the types of qualifying plant and machinery which could be eligible under the scheme.

Unfortunately, there is no list of what counts as qualifying plant and machinery and therefore it can be a time consuming exercise to identify which expenditure is eligible under the capital allowances regime. We know that many specialist items can be qualifying items but there are also ordinary items of expenditures which are not unique to care homes but are often overlooked, including:

  • Fixtures such as bathroom suites or kitchens;
  • Lifts;
  • Water and heating systems;
  • Hot and cold water systems;
  • Air conditioning units;
  • Lighting systems;
  • Electrical systems; and
  • Fire alarm and CCTV systems.

Within a care home settings there is specialist health and care equipment which also qualify, including:

  • Patient lifts and hoists;
  • Rehabilitation equipment;
  • Specialised beds and mattresses;
  • Safety equipment;
  • Medical gas systems; and
  • Alterations within buildings to install equipment.

These examples represent a range of specialist equipment that plays a crucial role in the care and well-being of residents in a care home setting.

There are several benefits to making sure your business makes a valid claim under the full expensing scheme or indeed other types of capital allowance scheme. Firstly there is an immediate ability to deduct your expenditure on the qualifying item from your corporation tax bill, contributing to overall tax efficiency. Additionally, ensuring that you properly account for your expenditure in your accounts is an important part of having a compliant tax return which stands up to scrutiny by the tax authorities.

Lifecycle of a Business – Fundraising in a Tax Effective Manner

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.

Fundraising in a Tax Effective Manner

Last week, we discussed some of the fundraising options for a company. While the considerations set out in that article are important, fundraising decisions are often tax-driven and no discussion would be complete without considering these tax consequences.

The general picture

Traditional investing by a UK tax resident in the shares of a UK company comes with an income tax charge on any dividend for investors, along with a capital gains tax (CGT) charge on the gain they make when they come to sell. Shares are generally acquired out of post-tax income and any capital losses may typically only be set against capital gains.

Issues for start-ups

Investors will want a return on their capital: either reliable dividend income or long-term capital growth or, ideally, both. However, many start-ups simply do not envisage profits for many years, and when they do start to generate profits, paying out dividends may not be a priority; often, they will need to plough the profits back into the business instead. Coupled with higher risks of failure (and so capital losses for investors), the tax system recognises that investors need to be enticed into investing into start-ups and other early-stage businesses.

Investment schemes

To give smaller and newer companies a level playing field there are a number of investment schemes that give investors enhanced tax breaks when they introduce new capital into the business by subscribing for shares. The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust Scheme (VCT) each encourage investors to finance smaller companies.

  • EIS was created to give direct tax relief to investors who subscribe for shares in small companies
  • VCT was designed to spread investment risk over a number of companies; investors invest in the venture capital trust, which will then buy shares in a number of qualifying companies
  • SEIS was designed to help new companies and start-ups

Tax breaks

These schemes give investors a varying number of tax breaks, which can include:

  1. Deferral of capital gains on assets sold to finance an acquisition of qualifying shares – meaning more money can be spent acquiring more shares and a tax bill delayed
  2. Income tax deduction on a percentage of the value of the investment in the year that it is made
  3. CGT relief on the gain made in the qualifying shares
  4. Ability to set any losses against income

This makes investing in eligible companies much more attractive, as investors can benefit significantly if values rise, but also have valuable tax benefits if the companies fail. This attempts to make higher risk small companies that need funding to grow, succeed and thrive a more enticing prospect compared to safer, more reliable, established companies.

Investee company conditions

Following perceived abuse of the schemes, new rules were introduced in 2018. These put in place a two-part condition, which requires the investee company to:

  1. Intend to grow and develop over the long-term (e.g have plans in place to increase revenue, customer base and number of employees (i.e. an SPV for a specific project would not meet this test)); and
  2. Have a significant risk of loss of capital to the investor greater than the net return (risk here is the commercial risk of the company failing in the market), i.e. the company must be significantly likely not to deliver a return for the investor.

In addition, there are a number of other conditions which the investee company must meet to enable investors to benefit:

SEIS EIS VCT
Type of company Unquoted (can be listed on AIM) Unquoted (can be listed on AIM) The VCT itself must be listed on the London Stock Exchange or on any other EU regulated Market, i.e. not on AIM. At least 70% of the VCT’s investments must be in unquoted companies (can be listed on AIM)
Ownership / subsidiaries The company must not be controlled by another company and must not have any subsidiaries that are not 51% or more subsidiaries The company must not be a 51% or more subsidiary of any other company and must not have any subsidiaries that are not 51% or more subsidiaries The VCT itself must not be a close company. Broadly this means that the VCT company must not be controlled by five or fewer shareholders or any number of directors
Assets The company must have no more than £350,000 in gross assets The company must have gross assets of less than £15 million before the EIS share issue and less than £16 million afterwards The companies that the VCT invests in must have gross assets of less than £15 million before the VCT share issue and less than £16 million afterwards
Employees The company must have less than 25 employees The company must have less than 250 employees (500 if the company is “knowledge intensive”) Each company that the VCT invests in must have less than 250 employees (500 if the company is “knowledge intensive”)
Time limits / restrictions No previous EIS or VCT investments can have been made. The company must be less than three years old EIS cannot apply if it has been more than seven years since the company’s first commercial sale (ten years if the company is “knowledge intensive”) Subject to some exceptions for “follow up investments”, VCTs cannot invest if it has been more than seven years since the target company’s first commercial sale (ten years if the company is “knowledge intensive”)
Trade The company must be trading, not have previously carried out another trade and must not carry out an excluded trade* The company must be a trading company but must not carry out an excluded trade* The VCT’s income must derive wholly or mainly from shares or securities. The VCT must distribute by way of dividend at least 85% of its income from shares. No more than 15% of the value of a VCT’s total investments can be in any one company. At least 70% of the companies invested in must be trading companies but must not carry out an excluded trade*
Limits No more than £250,000 per group can be raised in any three-year period (for SEIS to apply as mentioned above the company must not have any subsidiaries that it owns less than 51% of the shares in – this is the group for these purposes) No more than £5 million per year can be raised from any combination of SEIS, EIS and VCT. No more than a total of £12 million (£20 million if the company is “knowledge intensive”) per group can be raised from any combination of EIS, SEIS and VCT No more than £5 million per year can be raised from any combination of SEIS, EIS and VCT. No more than a total of £12 million (£20 million if the company is “knowledge intensive”) per group ca be raised from any combination of EIS, SEIS and VCT
Location Must be a UK resident company carrying on a trade in the UK or an overseas company with a UK permanent establishment carrying on a trade Must be a UK resident company carrying on a trade in the UK or an overseas company with a UK permanent establishment carrying on a trade

*Carrying out an excluded trade means that more than 20% of the company’s business and excluded trades include:

  1. dealing in land, commodities, futures, shares, securities or other financial instruments
  2. dealing in goods other than in the course of an ordinary wholesale or retail distribution trade
  3. financial activities, such as banking or insurance
  4. leasing assets for hire
  5. receiving royalties or licence fees (save for intangible assets)
  6. legal or accountancy services
  7. farming / woodlands and timber production
  8. property development
  9. nursing home or hotel management or operation
  10. producing coal or steel
  11. shipbuilding
  12. energy generation or supplying or creating fuel
  13. providing services to a connected person conducting an above trade

Investor conditions

There are also conditions for the investor themselves to meet:

SEIS EIS VCT
Type of shares acquired Newly issued ordinary shares Newly issued ordinary shares Shares in the VCT can be bought on the open market, however second-hand shares will not entitle you to up front income tax relief
Payment for shares Cash only Cash only Cash only
Tax avoidance The subscription for the shares of the company must not form part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax The subscription for the shares of the company must not form part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax
Period of ownership to qualify for CGT relief on sale Three years minimum Three years minimum Five years minimum
Connection The investor cannot be an employee of the company or any qualifying subsidiary during the period of three years commencing with the date the shares are issued (a director position is acceptable but compensation must not be excessive). The investor must not have a substantial interest in the company The investor must not be connected to the company (i.e. either alone or with associates owning or entitled to acquire more than 30% of the share capital, voting power or assets or any subsidiary on a winding up OR being an employee of the company or its group (can be a director but must not receive excessive compensation)) VCT cannot have more than 15% of its total investments in any one company

Investor benefits

Provided that these conditions are met, the investor can receive the following benefits:

SEIS EIS VCT
Annual investment upon which investor can obtain tax relief £200,000 £1 million
(£2 million if at least £1 million is invested in knowledge intensive companies)
£200,000
Percentage of investment on which income tax relief can be claimed 50% 30% 30%
Income tax relief on dividends? No No Yes
CGT relief on initial investment 50% capped at £100,000 100% N/A
Type of CGT relief on initial investment Deferral Deferral N/A
Gains exempt from capital gains when investment sold? Yes, if income tax relief was received Yes, if income tax relief was received Yes. The VCT itself is also exempt from corporation tax on chargeable gains
Relief for capital losses against income Yes Yes No
Inheritance tax (IHT) Any investment made in a SEIS-qualifying company held at the time of death is exempt from IHT after it has been held for two years Any investment made in an EIS-qualifying company held at the time of death is exempt from IHT after it has been held for two years No relief from IHT as holding shares in an investment company

The capital gains deferral for EIS and SEIS allows an investor to defer their gain from the sale of any asset by spending the proceeds on EIS or SEIS shares. You must make the investment between one calendar year before and three calendar years after you sell the asset.

A bit of maths

An investor sells an unrelated capital asset for £140,000, making £100,000 of profit. Usually, this £100,000 would be subject to CGT. However, he invests the full £100,000 of profit into a company that qualifies for EIS. His CGT on the £100,000 is therefore deferred.

In that year he obtains £30,000 worth of income tax relief. His net investment cost is therefore, £70,000.

If you have any questions around any of the above or wish to discuss your options further, please contact our Tax team who would be delighted to assist.

Disclaimer

This note reflects the law as at 6 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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Is there a capital gains tax problem on sale of marital property? Michael Armstrong and Rebecca Anstey write for Taxation

Large Buildings

Private Client Counsel, Michael Armstrong, and Private Client Associate, Rebecca Anstey, have written a piece for Taxation answering the reader’s question ‘Is there a capital gains tax problem on sale of marital property?’

In the article, Michael and Rebecca focus on a case study of a couple. Mrs B suffered a serious psychotic episode two years ago and is now permanently in hospital care. Mr B wishes to sell their home, so would like to know:

  • whether principal private residence relief (“PPR relief”) will apply; and
  • if not, whether he could transfer her share into his own name before selling using the lasting power of attorney Mrs B granted him.

Michael and Rebecca highlight that:

  • Mr and Mrs B will still be treated as ‘living together’ and having one residence for the purposes of PPR relief unless separated under a court order, by deed of separation, or in circumstances in which separation is likely to be permanent.
  • If Mr and Mrs B are permanently separated, Mrs B should still be eligible to claim PPR relief on her share of the property as the final period allowance should be extended to 36 months because she is a long-term resident in a ‘care home’ (defined in the legislation to include any establishment that provides accommodation and nursing or personal care).
  • Where an asset is transferred between spouses, such as the proposed transfer to Mr B, it will be a “no gain, no loss” transfer. This means that, unlike other gifts, no CGT liability should arise as the recipient spouse takes over the other spouse’s acquisition cost. However, previously, this treatment did not apply to separated couples after the end of the tax year in which they separated.
  • The provisions of Finance (No.2) Act 2023 (in force from 11 July 2023) now mean that if Mr B were to acquire his wife’s share of the property, then this no gain/loss treatment could now continue until the end of the third tax year after the couple ceased living together (even if Mrs B were not a long-term care home resident).
  • If Mrs B does not have capacity to make decisions, Mr B should be able to use the LPA to manage Mrs B’s share of the property but the court would need to approve a gift of it to Mr B and any sale or other transfer would need to be in her best interests.

Download the full article here.

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Consider the following options… – Elizabeth Small writes for Taxation

Tax Partner, Elizabeth Small, has written for Taxation on the tax consequences of the different ways of owning and operating a hotel.

When recently sipping a coffee in a hotel lobby, I was pondering (being between books) that there are a number of ways in which a hotel might be owned and operated and that each of these will have a raft of different tax consequences. In the following scenarios I am going to assume that the freehold to a Brighton hotel is owned by ‘HotelCo’, a single purpose entity which is ‘property rich’. The scenarios to be explored are:

  1. UK tax resident friends and family own the shares in HotelCo (in this scenario, a UK tax resident company) which owns the freehold interest and operates the hotel;
  2. HotelCo is a non-resident company, owned by non-resident persons, and has leased the hotel to ‘Opco’, a wholly-owned subsidiary which operates the hotel (as explained further below, little turns on where the central management and control (CMC) of OpCo is or indeed where OpCo was originally incorporated);
  3. HotelCo is rebranded as LandlordCo (again it is nonresident both in terms of CMC and incorporation) and lets the property to a third party branded hotel tenant, ‘LeaseCo’;HotelCo is rebranded as ‘NRHotelCo’ (obviously non-UK tax resident) and enters into a hotel management agreement (HMA) with a third party branded company, ‘HMACo’.

The full article can be read here.

Elizabeth Small
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Kelly Noel-Smith and John FitzGerald write for Taxation on the UK tax residence net

Private Client Partner, Kelly Noel-Smith, and Private Client Senior Associate, John FitzGerald, have written an article for Taxation entitled ‘No escape’ in which they explore the question of whether an individual escapes the UK tax net when they become non-UK resident?

The article is derived from the ‘Relocating to the UK’ campaign of Forsters’ Senior Executives Advisory Committee, which Kelly leads and of which John is a key member. It highlights these key points:

  • the temporary non-residence rules;
  • dual residence: an individual may be resident for tax purposes in more than one jurisdiction and may benefit under the provisions of a double tax treaty;
  • the 2015 CGT changes for non-residents;
  • the election for a property to be treated as a main residence for the purposes of PPR relief; and
  • minimising exposure to UK tax during a period of non-residence.

The full article can be read here.

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Will lease extension be deemed a disposal for tax purposes? Elizabeth Small and Lucy Barber write for Taxation

Tax Partner, Elizabeth Small, and Head of Residential Property, Lucy Barber, have answered a reader’s question for Taxation on lease extensions.

In the article, entitled ‘Will extension be deemed a disposal for tax purposes?’, the reader asks:

“A client owns the freehold of a block of flats in London and granted a 99-year lease for one of the flats to a lessee some years ago. A premium was received which was subject to tax under the usual part disposal principles. The lessee now wishes to extend the lease to 999 years and a further premium of £10,000 will be paid. I understand that the premium is relatively small as there is little difference in value between a 99-year lease and a 999-year lease. It seems that the transaction will be deemed for tax purposes as a disposal of the old lease by the lessee and the grant of a new lease by the freeholder.”

Elizabeth and Lucy explain that typically, the extension will be outside the terms of the current lease and therefore it will be treated as though there was a surrender of the old lease and the grant of the new longer lease. Sometimes, it may be possible to ameliorate this by ensuring that there is not a surrender and regrant, and instead grant a reversionary lease which takes effect at the end of the term of the existing lease. A supportable valuation of the reversionary freehold interest and the value of the lease surrendered will be key to determining the tax impact, and awareness of these issues is key to ensure that a proportionate tax result is achieved.

The full answer can be read here.

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James Brockhurst to speak on Tax issues for Middle Eastern families at Informa Connect’s Cross-Border Planning Conference 2023

Private Client Partner, James Brockhurst has been invited to speak at Informa Connect’s Conference ‘Cross-Border Planning: Wealth Management Solutions for the New Age Business Family’.

Taking place from the 25 – 26 October in Dubai, the programme will provide updates on key issues facing the internationally mobile private client, as well as provide opportunities to discuss succession planning, immigration, family governance and family offices, and business law developments.

James will be speaking at the panel discussion ‘Introduction to US, UK and Canadian Private Client Issues in the Middle East’, which will cover the following:

  • Case studies from each jurisdiction
  • Tax planning Issues with trusts
  • Residence and domicile issues
  • How do you expatriate and what is a US/UK/Canadian citizen?
  • Considerations for banking problems and FATCA/CRS

Joining James on the panel will be John Shoemaker, Partner at Butler Snow, and Reaz Jafri, Counsel at Withers.

For more information and to book a place at the event, please click here.

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James Brockhurst

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The Property Tribunal determines the issue of VAT on Staff Costs

The First Tier Tribunal (FTT) yesterday handed down its judgment in the matter of Various Lessees of Battersea Reach and St George Wharf -v- St George South London Ltd (and others).

The decision is likely to have important consequences for landlords and managing agents, and it should resolve the longstanding uncertainty following the decision in Ingram v Church Commissioners [2015] and HMRC’s subsequent clarification of the VAT treatment for the supply of services made by managing agents.

Lessees in two large multistorey mixed-use developments next to the river Thames had argued that staff should be directly employed in a way which would not attract VAT. They suggested that a change in employment would achieve the stated objective and not cause any significant cost or disruption to the service provided and that it was unreasonable for landlords to refuse to do so.

The tribunal found in the landlords’ favour, determining that, in deciding not to employ site staff directly, the landlord acted reasonably. They concluded that “…both the management and tax risks involved in changing the arrangements for the employment of staff were such that it was not unreasonable for a landlord to refuse to do so.”

The lessees had suggested that there were different models which could be implemented that would enable the landlords to benefit from a VAT saving on staff costs. However, the lessees had failed to show these “were realistically capable of being implemented” or “make a coherent initial case as to an alternative course for the landlord to adopt and for the Tribunal to consider either at the outset of the application or at any time thereafter.”

In the circumstances, the VAT on staff costs included in the service charges was deemed to be reasonable, and the lessees’ application was dismissed.

Forsters was led by Senior Associates Ryan Didcock and Emma Gosling, and Partner Natasha Rees, acting for the freeholder and associated landlords, with counsel Philip Rainey KC and Carl Fain of Tanfield Chambers (property), Nicola Shaw KC and Sam Brodsky of Gray’s Inn Tax Chambers (tax), and Michael Lee of 11 Kings Walk Chambers (employment).

Analysis of Supreme Court’s decision in Moulsdale v CRC: Elizabeth Small writes for Taxation

Corporate Tax Partner, Elizabeth Small touches on the Supreme Court’s decision in Moulsdale v CRC, concluding that taxpayers using anti-avoidance provisions against HMRC and arguing for a wide construction of the anti-avoidance rules are never going to gain much traction with the courts.

Small touches on the fact that Mr Moulsdale thought it was worthwhile going all the way to the Supreme Court (Moulsdale trading as Moulsdale Properties v CRC (Scotland) [2023] UKSC 12) to argue this point (disagreeing with HMRC’s assessment that he should have charged VAT) where he, trading as Moulsdale Properties (Moulsdale):

  • purchased office property (paying VAT on the purchase price) – the price was over £250,000 so the property was an item subject to the capital goods scheme;
  • exercised an option to tax over the property (recovering as allowable input VAT most of the VAT paid on the purchase price); and
  • in 2014, sold the property without charging VAT?

Read the full article here.

Elizabeth Small
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Avoiding Unwanted Tax Liabilities When Buying a Home in the UK – Xavier Nicholas writes for Abode2

Alongside identifying quality support on conveyancing, it is essential that international buyers seek legal advice on the tax implications of acquiring a home in the UK.

Unexpected tax liabilities can surprise the unprepared, while well-advised buyers will have the best chance of limiting their exposure.

The main concern will be inheritance tax (IHT). Non-UK domiciled individuals are subject to IHT at a rate of 40% to the extent that the value of their UK estates exceeds the tax-free ‘nil rate band’ allowance (NRB). At a modest £325,000 (or in some cases, £500,000), the limited scope of the NRB can come as a shock to those relocating from (say) the US, where the amount that can pass free of federal estate tax is currently $12.92m.

Owing to significant changes in legislation over recent years, the options for mitigating IHT are limited. Good advice is needed to navigate the rules successfully and ensure that ownership arrangements are tax efficient. Planning might include securing the exemption that applies to transfers on death between spouses and civil partners, using debt to reduce tax exposure, specialist life insurance, and (in some circumstances) co-ownership of a property with children.

In all cases, buyers should take advice before completing a purchase, as some forms of planning may not be effective if put in place later on.

Special attention is needed for those who will continue to be subject to tax in another jurisdiction. Double taxation agreements and cross-border reporting may add to the need for a pre-purchase check-up. For those with a US connection, acquiring a property in the UK makes specialist advice on US-UK estate planning a must-have.

UK tax legislation, with all its complexity and intricacies, has a habit of leading the way in making the case for fact-specific legal counsel. Pre-purchase tax advice should be at the top of the to-do list for those thinking of acquiring a home in the UK.

This article was first published for the Abode2 luxury property publication, which can be accessed here.

For more information on our services for individuals and families relocating to the UK, see here.


Moving to the UK – Everything you need to know

Moving to the UK is an exciting life event whether it be a short-term move for work to explore business prospects or a more permanent relocation with the whole family; the UK offers an eclectic range of options to live, work and learn, from the cityscapes of London to vineyards in the English countryside and historic university towns in-between. Setting up life in a new country can feel daunting too and it can be difficult to know where to start.

Moving to the UK

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How to avoid double taxation and UK inheritance tax? Xavier Nicholas answers reader question in the FT

Head of Private Client, Xavier Nicholas, answers a reader in the Financial Times who asked how, as US citizens moving to the UK, he and his family could avoid the traps of double taxation and manage exposure to UK inheritance tax.

In his reply, Xavier explains the importance of getting advice before moving, highlights the impact of US worldwide taxation, and draws attention to some of the potential mismatches between the US and UK tax regimes.

The question and answer are available to view here (behind a paywall).

Xavier Nicholas
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Xavier Nicholas

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The Taxation of Heritage Assets: Rebecca Meade writes for ThoughtLeaders4

Private Client Senior Associate, Rebecca Meade, has authored an article for the ThoughtLeaders4 Private Client Tax Magazine entitled ‘Saving heritage assets for the nation whilst saving tax – the taxation of heritage assets’.

In the piece, Rebecca covers the acceptance in lieu (“AIL”) scheme, that allows taxpayers to give ‘pre-eminent’ assets to qualifying public institutions in payment of inheritance tax. She goes on to address what is considered a ‘pre-eminent’ asset, provides an example of the AIL scheme in practice, and explains the various other tax reliefs available for national heritage assets.

The full article can be accessed here.

If you would like further information on the topic of the taxation of heritage assets, please contact our Art and Cultural Property Team.

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Charlotte Evans-Tipping to speak at ThoughtLeaders4: Wealth/Life Middle East conference

Private Client Senior Associate, Charlotte Evans-Tipping, has been invited to speak at the ThoughtLeaders4: Wealth/Life Middle East Conference.

This exclusive event for international private client advisors has been curated ‘by the experts for the experts’ and will span across two days. Charlotte will be speaking at the session entitled ‘Working with Family Offices: Should you have one? Setting One Up? Client, Obstacle or Threat?’ alongside Krya Motley of Boodle Hatfield and Sally Tennant OBE of Acorn Capital Advisors.

The conference will take place from 15 to 17 November 2022. You can view the full agenda, and register to attend here.

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SDLT cuts – what do they mean for me?

Following the Mini Budget delivered on 23 September 2022, residential Stamp Duty Land Tax rates have changed (again). Unlike Sunak’s “SDLT holiday of 2020-2021”, Kwarteng has confirmed that these cuts are permanent – a relief for the real estate sector at the prospect of no looming SDLT deadlines.

Unless you are a first time buyer, the cuts are far from ground-breaking but are no doubt intended to be the Mini Budget’s mini boost for the residential property market and will be gratefully received by many.

FAQs

Do the changes apply to me?

Yes, if you are:

  • purchasing property in England or Northern Ireland;
  • have not yet exchanged contracts; or
  • have exchanged contracts but have not yet completed your purchase

When are the SDLT changes effective?

Immediately (i.e. from 23 September 2022)

Is there a cut-off date by which I need to exchange/complete?

No, the government has confirmed these cuts are permanent.

How much will I save?

This will depend on your purchase price and the rate of SDLT which applies. For a freehold property on a purchase price of £500,000:

  • a first time buyer would save £6,250
  • a UK buyer replacing their main residence would save £2,500
  • a UK buyer purchasing an additional property would save £2,500
  • a non-UK resident buyer purchasing their first property worldwide would save £2,500
  • a non-UK resident buyer purchasing an additional property would save £2,500

What if I have already completed?

Unfortunately the cuts will not apply if you completed on your property purchase on or before 22 September 2022.

For further information on SDLT rates please contact the Residential Property team.


Buying and selling luxury residential property in a competitive market

The purchase or sale of a high value home requires expert legal advice to manage the complexities involved. Our lawyers are dedicated to sharing their knowledge to enable you to navigate the legal practicalities of buying and selling high value assets. We will support you through every stage of the process, and with the largest dedicated Residential Property team in London, we have the strength to do this. Visit our Hub to learn more.

Forsters' Luxury Residential Property Hub

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Freeports key to hydrogen hubs – Elizabeth Small writes for Property Week

Corporate Tax Partner, Elizabeth Small, has written for Property Week’s Legal and Professional section on the benefits of siting “green” hydrogen production plants in Freeports.

Freeport-based green hydrogen sites could serve as accessible international hydrogen exportation points and provide a clean fuel for maritime use, while also benefitting from the various Freeports tax incentives, including an exemption from stamp duty land tax.

In Small’s opinion: “If the freeport status does its job of creating a dynamic high-growth cluster, there is a happy side effect in the attraction of the many experts, investors and innovative businesses that will be vital to the hydrogen ecosystem.”

To read more about the benefits of Freeports and how they may be used for a net zero future, click here.

This article was first published in Property Week on 24 August 2022 and is available to read in full here, behind their paywall.

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Residential Property Developer Tax – the clock’s ticking

As Residential Property Developer Tax (“RPDT”) has now begun, it’s worthwhile reminding ourselves of the key points surrounding it.

Announced by the UK government a little over a year ago, in February 2021, RPDT is essentially a tax to be paid by residential property developers, which is intended to repay the government for the costs of remedying dangerous cladding on high-rise buildings. Sadly, it took the Grenfell Tower tragedy in 2017 for the dangers to come to light.

RPDT will apply from 1 April 2022 at a rate of 4% of profits which exceed £25 million per annum and which arise from UK residential property development activities. According to the government, the intention is to raise £2 billion over the next 10 years although no repeal date for the tax has been legislated, so it will be a case of “watch this space”.

Tax partner, Elizabeth Small, wrote about RPDT for Taxation magazine in December 2021. Her article, which answers key questions for property developers about the tax, can be found here.

Disclaimer

This note reflects our opinion and views as of 7 April 2022 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

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