This month, we consider what's in store for private clients with a new Labour government and the likely timeline for implementation. We comment on a recent FTT decision which accepted HMRC's broad interpretation of the remittance rules (Alimahomed). Three recent taxpayer wins in relation to SDLT (Hurst, Suterwalla and Marie Guerlain-Desai) demonstrate that, with the right fact pattern, claims for SDLT reliefs can still be successful. Finally, the FTT's decision in Wardle illustrates the hurdles which must be overcome by the taxpayer in arguing that their business had commenced trading for the purposes of entrepreneurs' relief.
General election
2024: what's
next for private
clients?
Following an emphatic win on 4 July, the new Labour government is keen to implement manifesto commitments as quickly as possible. So, what can private clients expect?
Key policies
The Labour Party's election manifesto, published in the run- up to the election, emphasised the party's commitment not to ‘increase taxes on working people', with a pledge not to raise national insurance, income tax, VAT or corporation tax rates.
However, funding for schools and the NHS is to be found by implementing Labour's well-publicised policies, including the abolition of the ‘non-dom' regime, the imposition of VAT on private school fees and the closure of the carried interest ‘loophole'. Support for local authorities will be given through increasing the rate of the stamp duty surcharge paid by non- UK residents, likely by a further 1%, meaning that the top rate of SDLT applying to non-UK residents would increase from 17% to 18%.
The topic of CGT was conspicuously absent from the Labour manifesto, and concerns have been sparked by various senior Labour figures refusing to rule out a rise in CGT rates, repeating instead that ‘nothing in our plan requires additional tax to be raised'. In recent weeks, Sir Keir Starmer KC has ruled out imposing CGT on individuals' main homes; however, entrepreneurs and investors may remain concerned about other reforms to this tax in the event that the new government requires additional funding.
Labour's manifesto also did not contain any references to inheritance tax reliefs. Media reports have previously suggested that the abolition of agricultural and business property reliefs, as well as the inclusion of pension pots within the scope of inheritance tax, were proposals that were being considered by the Labour Party. However, it remains to be seen whether any inheritance tax reforms will be implemented.
Timing
The Labour manifesto includes a general statement that Labour will ‘begin to put these policies in place from day one of a Labour government'. However, Rachel Reeves has confirmed that she will not deliver a Budget without an OBR forecast (which requires ten weeks' notice), meaning that the earliest that the new government's first fiscal event can take place is mid-September.
Ms Reeves has also stated, in respect of the imposition of VAT on private school fees, that although such changes would be included in her first Budget, they would not be applied retrospectively. Expected timing in respect of some of the more complex reforms (in particular, the replacement of the non- dom regime and associated inheritance tax changes) remains unclear. The previous government had committed to holding a consultation on the inheritance tax aspects of the non-dom reforms but it is unclear what the new Labour government's position is on this, so a firm timetable may not emerge for some time.
Interpretation of the remittance rules: taxpayers beware
Readers may be forgiven for thinking that, with the UK government pledging to abolish the non-dom regime in the near future, they may soon no longer have to worry about the detailed rules on what constitutes a remittance to the UK. However, there is currently no suggestion that the treatment of income and gains which arise before the new rules come into force will be any different than it is today. Since conceptually the remittance basis is a deferral not an exemption, a taxable remittance can take place at any time after the income or gains originally arose; even relatively simple HMRC enquiries can take several years to resolve, so it seems that debates about what is and is not a remittance are likely to linger for many years to come.
The recent FTT decision of Alimahomed v HMRC [2024] UKFTT 432 (TC) illustrates the potential for these rules to be engaged long after a taxpayer actually receives particular non-UK income and gains, and also serves as a warning that the courts may be prepared to accept a wide interpretation of the legislation.
The case deals with a remittance basis taxpayer (‘T') who had made various transfers and payments out of an overseas bank account which contained non-UK income. These included:
- transfers to the UK bank accounts of various friends and family (who were not relevant persons for remittance purposes); and
- payments to settle credit card bills relating to UK expenses received in the UK by T's adult son (again, not a relevant person), as well as purchasing jewellery in the UK for
The question was whether the overseas funds had been ‘brought to, used or received in' the UK ‘by or for the benefit of' a relevant person in relation to T. If so, the payments would constitute taxable remittances.
T argued that:
- aside from the jewellery for his own use (which, T argued, fell within a personal use exemption), he did not himself ‘use' or ‘receive' any of the money in the UK;
- he had not ‘brought' the money to the UK: having left his account, the money ceased to be his, and it was not therefore his when it entered the UK. If anything, he had ‘sent' the money to the UK, which is a different concept from ‘bringing' it;
- as a matter of banking law, a bank transfer simply involves a reduction in the amount owed by the payer's bank to the payer, and an increase in the amount owed by the payee's bank to the This analysis is not consistent with T ‘bringing' money to the UK.
HMRC disagreed, arguing that ‘brought to' should be given a wide meaning, to include ‘sent to' and in any event to include bank transfers to UK accounts, regardless of whether the taxpayer or any relevant person benefited from those transfers in the UK. They also argued that a repayment of an offshore credit card in respect of UK expenditure constituted a remittance, regardless of whether such expenditure was for the benefit of a relevant person, on the basis that such use of the credit card creates a ‘relevant debt' for remittance purposes. Finally, they argued that the personal use exemption is intended to cover jewellery bought outside the UK and brought into the UK, and not jewellery which was bought in the UK to begin with.
Aside from some procedural points, the FTT agreed with HMRC on all points, adopting a broad brush, ‘purposive' interpretation of the legislation. The decision confirms that HMRC are prepared to argue for – and the FTT may be prepared to accept – a broader interpretation of the remittance rules than is always obvious from the plain wording.
Alimahomed confirms that the FTT may be prepared to accept a broader interpretation of the remittance rules
SDLT: bucking the trend with recent taxpayer victories
HMRC have a strong record in challenging taxpayers' claims for SDLT relief. However, in a recent trio of cases, the taxpayers succeeded in bucking this trend.
In Hurst v HMRC [2024] UKFTT 540 (TC), the taxpayer bought a house and applied the non-residential SDLT rates on the basis that the sellers had used it as an HISE (hotel, inn or similar establishment). HMRC challenged this; however, although the FTT considered the case to be ‘highly marginal', it concluded that the sellers' activities sufficed to constitute commercial use with enough permanence and continuity for the property to be an HISE (and for non-residential SDLT rates to apply). One of the factors that might have undermined HISE categorisation was that business rates were not payable as less than 50% of the property was used as an HISE. However, the tribunal considered that it was not necessary for more than 50% of the property to be so used for the non-residential SDLT rates to apply.
In HMRC v Suterwalla and another [2024] UKUT 188 (TCC), the UT upheld the FTT's decision (previously commented on in our July 2023 column) and confirmed the taxpayers' victory over HMRC in their claim for mixed-use rates of SDLT. Although the UT accepted HMRC's argument that the grant, immediately following completion of the purchase, of a grazing lease on a paddock belonging to the property was not, on the facts, relevant to the SDLT position, it agreed with the taxpayers that the paddock did not form part of the house's grounds. It was not visible from the house, was not connected with the dwelling, was registered on a separate Land Registry title and the only access to it was from a single small gate. The paddock was not, therefore, residential property. HMRC's appeal was dismissed.
Finally, in Guerlain-Desai v HMRC [2024] UKFTT 515, the taxpayer bought a house with 32 acres of land. They initially paid the residential rates of SDLT but claimed a refund on the basis that the 12-acre woodland behind the property did not form part of the property's grounds, and so mixed-use rates should apply. The tribunal concluded that the woodland was not part of the grounds of the property for SDLT purposes and allowed the taxpayer's appeal. HMRC did itself no favours here, as it transpired that no one from HMRC had visited the property (despite claiming that the wood could be ‘viewed from the dwelling house') or independently verified what was said in the sales brochure. In contrast, the taxpayer provided detailed photographic evidence to substantiate their claim that the woodland was non-residential.
These decisions demonstrate that, in the right circumstances, a claim for SDLT relief can withstand challenge from HMRC. Like all SDLT cases, these cases are highly fact specific, but taxpayers should take comfort in the fact that is possible to successfully argue that a property should be considered non-residential or mixed use, if the facts back such a claim and the taxpayer is able to provide evidence to support their position.
HMRC fails on ‘not trading' argument for entrepreneurs' relief
In Wardle v HMRC [2024] UKFTT 543 (TC), the FTT held that entrepreneurs' relief (now business asset disposal relief) was available in respect of the taxpayer's disposal of an interest in an LLP. This was despite the LLP not actually being in a position to make the supplies (electricity) which were its trade.
To briefly recap on the law, an LLP must have been trading for two years at the point of disposal for entrepreneurs' relief to be available. In this case, HMRC refused the taxpayer's claim for entrepreneurs' relief on the grounds that the LLP was not trading throughout the two years prior to the disposal. Although the LLP had started construction and begun the initial steps of operating an energy power plant, it had not completed construction, commissioning was outstanding, regulatory certification had not been obtained and electricity had not been produced. The taxpayer appealed.
The central issue for the FTT was when (if at all) the LLP had commenced trade. The FTT applied the three-step test in Mansell v HMRC [2006] 7 WLUK 10 (approved by the High Court). It agreed with the taxpayer that the LLP had been trading throughout the two years prior to the disposal: it had organised its structure, secured finance, and issued notices to proceed under various contracts. The LLP had determined the activity it would carry out and the FTT considered that some of the contracts amounted to ‘operational activity' even though the LLP had not yet made a sale. The taxpayer's disposal of his LLP interest therefore benefited from entrepreneurs' relief.
This case highlights the hurdles that a taxpayer must overcome to argue successfully that a trade has commenced prior to making sales (indeed, the taxpayer had lost similar arguments before the tribunal on two previous occasions). It also provides a useful summary of the complex case law in this area. While this case is highly fact sensitive and the test for commencing trade remains somewhat of a grey area, it demonstrates that a significant amount of preparatory work is likely to be required for a business to commence trading without having made any sales.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.