Plucked Goose

Agricultural buildings allowances (ABA) are available for capital expenditure incurred on the construction of agricultural buildings. These include  barns,  farm buildings, and cottages. A farmhouse also qualifies, but the allowance is restricted to only a third of the expenditure incurred.

For capital expenditure to qualify, it must be expenditure incurred on the construction of  an agricultural building, for the purposes of husbandry on the land.

In addition, the 'relevant interest' should not have been sold, or if it has been sold, it has been sold only after the first use of the building. Generally speaking, the 'relevant interest' is the freehold or leasehold to which the person incurring the expenditure was entitled.

'Husbandry' includes any method of intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption, and the cultivation of short rotation coppice.

Unlike industrial buildings allowance (IBA), there are no provisions for restricting allowances if the building is not in agricultural use at the end of an accounting period. However, if the first use of an agricultural building is for non-agricultural purposes, no allowances are to be given. Any allowances already given are clawed back.

Like IBA, relief is given at 4 per cent per year on a straight-line basis, with the result that no relief is given after the building has passed its 25th year.

Balancing adjustments

Budget 2007 provides for the phasing out of ABAs with effect from 2009-10. However, in order to ease the way to its abolition, 'balancing adjustments' are withdrawn in respect of any contracts entered into for the disposal of agricultural buildings on or after 21 March 2007.

The Chancellor announced in the Budget on 21 March 2007 that both industrial and agricultural buildings allowances are to be phased out (pdf) in the coming years. They will be replaced by another reliefs package. In order to ensure smooth transition to the new system, 'balancing adjustments' will not be permitted in respect of contracts entered into on or after 21 March 2007.

For the rest of this article, I will focus on the operation of the industrial buildings allowance.

In ascertaining the value of the death estate for the purposes of inheritance tax (IHT), any liabilities or debts owed by the deceased at the date of death must be deducted.

Except. Yes, except. Many years ago, my personal tax lecturer taught me something very true: there is no such thing as a straightforward tax rule. There is always an exception or three. Remember that, and you won't go wrong. Always look for the 'except'.

Back to the topic: you can deduct from the death estate debts or liabilities owed by the deceased at the time of his death. So if the deceased had a death estate of, say, £200,000, and was owing £5,000 in bills, etc, the death estate is £200,000 - £5,000 = £195,000. However, this article is about a specific anti-avoidance measure aimed at catching out people who try to reduce the IHT payable by creating artificial debts, which can then be deducted from their death estate.

Good news for UK landlords of residential property. The Treasury have added to the list of energy-saving items in respect of which they may claim deductions. At the moment, such landlords may deduct expenditure incurred on the acquisition and installation of hot water system insulation, drought proofing, and solid wall insulation.

With effect from 6 April 2007, they may also deduct expenditure incurred on acquiring and installing floor insulation. The cap on the deduction is also being increased, with effect from that date. In place of the current restriction of the deduction to £1,500 per building, there is a new restriction of £1,500 per property.

So if a landlord owns several flats in a block, he may, from 6 April 2007, claim a deduction of up to £1,500 per flat. Before that date, he would have had to restrict himself to a total deduction of £1,500, irrespective of how many flats he had in the building, and how much expenditure he had incurred on each one.

The Government hopes that these incentives will encourage landlords to consider energy-efficient ways of developing their properties. Tasty carrots. Infinitely preferable to a big stick.

Reference: Energy-Saving Items Regulations 2007, SI 2007/831 (pdf).

I have been reading an interesting case that was recently referred to the Special Commissioner.

A trade was carried on by a company (which we shall call 2SPD), which had issued share capital of 60,000 ordinary shares of 1p each. Of that number, 59,932 (ie 99.87%) were held by a holding company (BHP). Of the remaining 68 shares, the taxpayer and his wife held 53, and the balance was held by a third party.

All of the shares in BHP were held by the taxpayer and his wife, the taxpayer holding a little over 50 per cent.The taxpayer claimed that his wife exercised her voting rights in accordance with his wishes, as he was in charge of running the business.

The taxpayer and his wife owned some farms and feed mills which they rented to 2SPD at normal commercial rates. They sold the assets and wished to claim rollover relief in respect of replacement assets.

The official interest rate has been increased from 5 per cent to 6.25 per cent.

The rate is used to determine whether a loan to an employee is a ''taxable cheap loan", and therefore subject to income tax.

If an employer lends money to an employee at no interest, or at an interest rate lower than the official rate, the cheap loan is a taxable benefit. The tax charge applies to the "cash equivalent" of the benefit. Generally, for any tax year, the cash equivalent is the difference between the interest on the loan at the official rate, and the interest paid on the loan.

There are two methods of calculating the cash equivalent. The "default" method uses the average balance of the loan for the tax year. Under the alternative method, interest is calculated on a day-to-day basis. The taxpayer may use whichever method favours him. The default method applies unless the taxpayer elects for the alternative. Where the default method gives an unlikely result, HMRC may insist on the alternative method.

The new rate takes effect from 6 April 2007. The previous rate (5 per cent) has been in place since January 2002. The increase means that there will be higher tax bills for certain employees who have taxable cheap loans with their employers. It also affects other cases where, even though an employee has not taken a loan, he has been deemed by legislation to have done so. An example of such a situation is where an employee is deemed to have taken out a "notional loan" because he has acquired employment-related securities for less than market value.

References: Taxes (Interest Rate) (Amendment) Regulations 2007, S.I. 2007/684; Income Tax (Earnings and Pensions) Act 2003 Part 3, Chapter 7.

HMRC have announced anti-avoidance measures to restrict the use of sideways loss relief by "non-active partners".

The term "non-active partners" refers to limited partners, and partners who spend an average of less than 10 hours a week personally engaged in the partnership's trading activities.

The measures will be contained in the next Finance Bill. Currently, the loss relief available to such partners is based on the amount of capital they have contributed to the partnership. The Finance Bill will provide that, in calculating the amount of relief available, capital contributed by a non-active partner on or after 2 March 2007 (the date of the announcement) will be disregarded, if the main reason, or one of the main reasons, for contributing the capital was to claim loss relief.

The Finance Bill will also introduce an annual limit to the amount of sideways loss relief which a non-active partner may claim. A non-active partner who sustains trading losses on or after 2 March 2007 is restricted to loss relief of £25,000 in respect of all the trading losses for all the partnerships in which he was a non-active partner for the tax year. Of course, if his losses amount to less than £25,000, his claim is restricted to the lower amount. Where sideways loss relief is not available, the losses are carried forward for offset against the the non-active partner's future partnership profits. This measure will scupper tax avoidance schemes in which taxpayers make significant contributions to certain partnerships, thereby generating losses against which they offset their other income or capital gains.

Before the introduction of the latest film tax regime by the 2006 Finance Act, film partnerships were prime candidates for such investment. Certain environmental projects are also good for this kind of investment; partnerships which create carbon credits which they intend to trade for profits tend to suffer losses in the early years, and as such, provide a good opportunity for an investor to claim loss relief. However, once the new loss relief rules come into effect, these too will lose their appeal.

UPDATE (9 March 2007): Following protestations by investors and the film industry that these proposals would damage the British film industry, HMRC backed down and made a few changes to its proposals. The above restrictions will not now apply to 'sale and leaseback' deferral arrangements (see example) made in respect of qualifying 'British' films.

NB. The new films tax regime introduced by the Finance Act of 2006 takes effect for films which commence principal photography on or after 1 January 2007. The rules we have been discussing above apply under the old regime, as they deal with films which commenced principal photography before 1 January 2007. Films which commence principal photography on or after that date are dealt with under another regime, and are outside the scope of the rules above.

A landowning couple have discovered that they are liable for repairs to the local parish church.

The couple had bought former glebe land. Under medieval canon law, the owners of such land were lay rectors of the parish, and were liable for the cost of repairs to the chancel of the parish church. There was a reciprocal right to tithes, but that was abolished in 1936. The couple were presented with a bill for repairs in 2000, which they refused to pay.

The case has only now been decided by the House of Lords, by which time the costs had climbed almost to  £200,000.

What does this have to do with tax? Well, when I read the news report of the House of Lords' decision, I remembered coming across this very case a few years ago, but in the context of tax and human rights. I did a little digging, and sure enough, there it was: Aston Cantlow and Wilmcote with Billesley Parochial Church Council v Wallbank and another [2001] EWCA Civ 713. This was at the Court of Appeal. The couple had argued that the liability for payment was contrary to the Human Right Act 1998, specifically, their right to peaceful enjoyment of their possessions. In addition, section 6 of the Human Rights Act 1998 provides that a public body must not act in a way that is incompatible with a right conferred by the European Convention of Human Rights.

Interesting news in the press about a businessman who has had to forfeit a tax overpayment of £846,000. According to the Daily Telegraph, this was because he had tried to claim it after the one year deadline for amending tax returns had expired.

True, but that is not the whole story. In fact, his appeal to the High Court did not even hinge on that point. His lawyers knew there was no hope of the one year deadline being disturbed, whatever the facts of the case, so they did not base their arguments on that. That issue did not even arise in the case, save for a few passing comments by the judge, Sir Andrew Morritt. He signposted the futility of bringing an action on that point. The deadline had passed, and that was that.

The case instead centred on section 33 of the Taxes Management Act 1970. In broad terms, that section provides for repayment where tax is overpaid as a result of error or mistake. However, sub-section (2A) of that section denies relief if the erroneous tax was computed on the basis of practice generally prevailing at the time the tax return was made.