Eric Warrington has recently married Jing to the disapproval of his two children, Peter and Jane.
Income tax – Pay £28,000 now
Eric Warrington received a notice from HMRC demanding he pay £28,000 within 90 days. The demand related to an investment Eric had made in a film partnership scheme and equalled the amount of tax relief he had received several years earlier. Eric had been aware that an issue had arisen with the scheme but he had not expected to be given such short notice to repay such a large sum.
Many film partnership schemes have been challenged by HMRC as tax avoidance on the basis that they were set up solely to take advantage of the tax incentives introduced to encourage investment in the British film industry rather than to carry on any genuine trading activity.
Accelerated Payment Notices
As part of the government’s efforts to tackle tax avoidance schemes, in 2014 HMRC were given new powers to require accelerated payment of disputed tax.
The new powers apply where avoidance schemes are subject to the Disclosure of Tax Avoidance Schemes rules, the General Anti-Abuse Rule, or where they are similar to a scheme that has already been defeated in the courts.
Upon receiving an ‘Accelerated Payment Notice’, a taxpayer has 90 days to pay the amount of disputed tax or make representations to HMRC if he considers the notice is incorrect (on the grounds that either the relevant conditions have not been met or the amount is wrong).
If the tax is not paid within 90 days of receipt, a penalty of 5% of the tax is incurred, with additional 5% penalties if still unpaid after five months and then again after eleven months.
If the taxpayer takes on HMRC and ultimately wins, the amount paid under the notice will be repaid to him plus interest.
After taking advice and learning that HMRC had won a similar case in the court of appeal, Eric ruefully accepted that he had little choice but to pay the £28,000. To fund the payment, Eric arranged for the W Family Investment Company to repay him part of the loan he had made to it, as the repayment would not trigger any tax liabilities.
Eric reviewed the new draft will he had received from his lawyer. The terms were broadly similar to his previous will but provided a cash legacy for Jing, who would also receive the property they lived in (which he had transferred into their joint names as agreed in their pre-nup) and that the balance of his assets would pass to his two children in equal shares.
Eric wondered whether he should include a specific provision for his business, EW Ltd. His son, Peter, was becoming more and more involved in the business, unlike his daughter, Jane, who had been noticeably more distant since Eric had married Jing.
Although Eric’s overreaching aim was to treat his children equally, if he left the shares in EW Ltd solely to Peter and everything else to Jane, there would be inequality in value, not least because the shares in EW Ltd would qualify for Business Property Relief and so be exempt from inheritance tax.
While any amount passing to Jing would also be exempt from inheritance tax under the spouse exemption, the remainder of Eric’s estate passing to his children would be subject to inheritance tax at 40% on the excess amount above the nil-rate band (then £325,000).
If Eric left his assets to his children equally, Jane would have as much say in the running of EW Ltd as Peter and Eric was not sure that would be good for the long-term success of the business, especially if Jane continued to take little interest in it. He wondered whether giving Peter 70% of EW Ltd and Jane 30% would be a more workable solution. Eric decided he needed more time to consider and he also wanted to discuss his plans with Peter and Jane.