BLOG 125


BLACKSTONE FRANKS BUDGET BOOKLET


We do our budget booklet for clients and friends of the firm the day after budget day. This isn’t because I don’t want to stay up all night on budget day to get something out that day (although, to be honest, I don’t). It’s because I want a bit of time to let the changes sink in and think a bit about the implications. Our philosophy is that our clients will have read about the changes in the newspapers before they get our booklet so what they will want to know is the potential problems that could arise, and how the proposals are likely to affect them. As well as the explanation of the proposals, we want to give them some commentary on the changes.

We are only a small team, so it is a tough job. We sent the text to the printers 8 0’clock Thursday night, having spent most of Wednesday afternoon and all of Thursday writing. Indeed, I started writing the previous weekend. I could do this because George Osborne had published a draft Finance Bill last December, so we already had much of the proposed legislation. I thought we had better briefly cover this so clients know everything that is going to happen from 5 April next.

George Osborne has developed an odd system for the budget and Finance Bill. Instead of announcing the changes for the coming year in March and enacting them, he seems to announce them a year in advance, so many of the changes announced this year actually relate to the year 2013/14 (the year to 5 April 2014). For technical changes this is good because it means that there is lots of time to think through the implications before the legislation is enacted.

Indeed there is an awful lot of consultation – too much to my mind! The Chancellor will announce something in the budget, consult on it during Summer or Autumn, and issue draft legislation just before Christmas so that experts can pick up areas where the draftsman may have missed a need for a relief or accidentally catch transactions that were not intended to be within the scope of the legislation. However it does make it difficult to remember what is going to happen when. It means that what is happening in April is a mixture of things for which we know the shape of the legislation and things for which we know very little until the Finance Bill is issued. Thankfully this is promised for this week – although last time I looked the Stationery Office website said “Out of Stock”!

It also means that there are some nasties that we were told about last year and have forgotten about. For example two of my interests outside tax are whisky and beer. I was relieved when the Chancellor said in his speech that he did not intend to impose further taxes on alcohol, but dismayed when I read the small print to find that the tax on beer was going up 3p a pint and that on whisky 41p a bottle – changes that he had announced in advance last year.

I didn’t think a lot of the budget. It’s funny how tax simplification always seems to mean scrapping reliefs and imposing more tax. It never seems to result in a tax reduction. I was staggered by the reaction to the decision that increased personal allowances for all means there is no need for a complex extra relief for those pensioners whose savings income is a bit above the State pension limit. That seemed a very sensible decision to me.

I was also surprised by the reduction in the 50% tax rate to 45% from 5 April 2013. I expected this to be Mr Osborne’s pre-general election giveaway in his 2014 or 2015 budget. It was bound to come in for a lot of criticism and although I, like most tax practitioners, feel that the 50p rate was ill-advised, those who were going to emigrate to avoid it have mostly already gone and a reduction to 45% is unlikely to lure them back. The extra 1% cut in corporation tax also surprised me as it is well-known that big business is hoarding cash in case the days get more rainy, rather than invest in jobs to rebuild the economy, so a corporation tax cut is likely to take more money out of the economy, the opposite of what the country needs.

I was personally depressed, albeit not surprised, at the fact that yet again there is no help for micro-businesses, apart from gimmicks such as the Seed Enterprise Investment Scheme and the cash basis for those tiny businesses that were not lured by Gordon Brown into incorporating a few years back.

So all in all, nothing to shout about, albeit that our budget booklet runs to 60 pages as compared with a norm of under 50. If anyone wants to know what we said about the budget and hasn’t received a copy, it can be found on our website, www.blackstonefranks.com.



ROBERT MAAS

BLOG 124


THE MANSION TAX – IS IT COMING?



I very much doubt it. Because it is a crazy idea and I think that George Osborne is too sensible to adopt it. It seems to be very much Vince Cable’s baby. Vince is an economist. I fear that he is long on economic theory and short on practical realities – although I doubt that his mansion tax makes sense even in theoretical economics.

It is not easy to discover much about Vince’s mansion tax. He told the 2009 Lib Dem party conference, “You may also recall that I proposed a small annual levy – half a penny in the pound – on property values over one million pounds. Since then we have seen the super-rich pouring their money not into job creating businesses but into acquiring mansions. And remember too that under our unfair council tax Messrs Mittal and Abramovich in their £30m palaces pay the same as a band H family home though their properties may be worth 40 or 50 times as much”.

Nick Clegg subsequently said that the plan had only been “floated” at the conference and that “clearly we had to do some homework”. The homework resulted in a revised proposal that only the owners of the estimated 80,000 homes worth more than £2million would be hit by the levy, which would be charged at 1% of the property’s value over the threshold. I am sure that only a cynic would say that Nick and Vince worked out that a large proportion of the 170,000 people with homes between £1million and £2million are potential Lib Dem voters. I suspect that Mr Abramovich and Mr Mittal are not voters at all. Only a cynic would think that in Lib Dem terms a “fair” tax is one that is designed to let out those with votes and catch primarily those without votes. I’m a cynic! It seems to me that when most of the populace talk about fair taxation, they mean that other people ought to pay more, not that they themselves ought to do so. Even when Warren Buffett argued that he should pay more tax, he only contended that he should do so going forward – as his earning life is drawing to a close. He did not suggest that he should do so retrospectively; now that he has made his billions in a low tax environment he would like a system to prevent others surpassing his success!

But I digress. The Lib Dem 2010 election manifesto put forward a mansion tax as part of the means to raise the income tax threshold to £10,000. George Osborne has already promised to do this without a mansion tax, so why is it being floated again?

And who are the 80,000 people – a bit over 0.01% of the population – who Mr Cable wants to tax. Certainly Mr Mittal and Mr Abramovich and others like them. International businessmen who choose to live in London but most of whose wealth and businesses are elsewhere. I seem to recollect that Mr Mittal owns most of what is left of the UK steel industry. So let’s drive him out of London. He has other homes elsewhere so doesn’t need a UK welcome; we’re desperately trying to avoid a recession so obviously we don’t want his jobs, let him take them elsewhere.

Also likely to be caught are I suspect, many UK CEOs of businesses based in the UK. Presumably the hope is that they can’t take their businesses abroad. But in most cases that is a fallacy. High taxes drove WPP to move its head office from the UK to Ireland but George Osborne did not say, “Good riddance”, as Mr Cable appears to want to do; indeed he has been effusively welcome at its decision to come back now that he has lowered corporate tax rates.

Then there are a number of elderly people living in houses bought many years ago. In the 1940’s you could buy a semi in London suburbs for well under £500. If you or your late husband paid £1,000 or £1,500 you may well now be in Mr Cable’s 80,000.

Then of course there are the ultra-rich, with houses all over the place. Many rarely visit the UK. They simply like to have a house here should they decide to do so, or should a friend wish to visit. They employ a few people in the UK to maintain the house and keep it in readiness. A lot of such houses are heritage property. But let’s not welcome absentee foreigners preserving our heritage when there are not the UK people able or willing to do so.

Let’s assume that it is a properly targeted tax. That the above are the people the country wishes to tax. Isn’t it a sensible tax? Well, there are a lot of problems. Firstly how much will it raise? Mr Cable says £3billion. Savills, a major property advisor, say that their research suggests £1billion. But even at £1billion that is a lot of money. It is probably a wing of a fighter plane. Secondly how do you identify properties worth over £2million? Clearly, you value them. I don’t have a clue if Mr Abramovich has a “£30million palace”. That may well be a ballpark figure. But so would be £28million. That’s a £20,000 difference in the tax. Won’t Mr Abramovich engage a valuer to challenge HMRC’s valuation? It won’t cost him £20,000 to do so. Indeed if HMRC say that a person’s house is worth £2.2million, reducing the value to £2million would save £2,000 in tax. Even at that level it is probably worth engaging a valuer to challenge it, particularly as if you win in year 1, HMRC are unlikely to try again for a few years.

The reality is that valuation is an imprecise art. It depends on comparing property A with what other properties have sold for. This works if property A is a suburban semi. It rarely works if property A is a £2million plus property because in reality there are no precise comparables. The valuer can look at a similar property and make adjustments, but no two valuers will make the same adjustments or, indeed, select the same comparables. So a mansion tax would be unbelievably expensive to collect.

Next, even if the tax is agreed, how do you collect it from Sheikh whatever in Saudi Arabia? In theory you bankrupt him in the UK and force a sale of the property. Again very costly though. And the first time you do it is likely to trigger a flight on capital from the UK – but we’re used to dealing with economic crises, so what’s the problem in triggering a new one?

And how do you collect it from the 80-year old widow living in the family home that her grandfather bought for peanuts? One answer I’ve seen is roll up the tax (presumably with interest) until she dies. So when she dies aged 100, she owes 20% of the value of the property plus interest of 7.5% for 20 years, which is probably another 30% of the value of the property. Add 40% inheritance tax and the State will demand 90% of the value of the property on the widow’s death. Is that fair? I doubt her children will think so.

Some people say, “Force her out of her home; it is underutilised. Of course that will depress the value of expensive properties as too many will come onto the market. But that’s a good thing. It makes them more affordable”. But does it? Are there really people out there who will say, “I will sell my £300,000 house and use the money as a deposit on a £1.5million house with a massive mortgage and, because it is a bargain as it used to be worth £2.2million, I will cross my fingers that its value will not grow to more than £2million?” I notice the Guardian, having a dig at Kirstie Allsop, who says that her parents and parents-in-law are both in that position, says, “Do say: From each according to his abilities, to each according to his needs. Don’t say “Can pay, won’t pay”. I don’t have a clue what this means. It appears to mean that poor widows ought to enter into equity release deals to raise the funds to pay the tax. But I don’t understand how they can do this, as equity-release sells the future for a heavily discounted sum today, but you don’t know what sum you need to raise to pay future taxes if you don’t know how long you will live.

There is of course some nonsense going around too. A mansion tax won’t “strike at the heart of property ownership”. Most people want to buy a house, not a £2million house. Is it a fair tax? If I have £20million of artworks in my £2million house, I do not pay the tax, but if I have £2million of artworks in my £20million house, I pay £180,000 p.a. tax. Is that fair? Discuss. If I have £20million invested on the stock exchange and rent my £2million house, I pay no tax. Is that fair? It may be, because at least I pay tax on the return I generate from the £20million, whereas my house generates no taxable income. But why should I pay tax on nothing? Before 1963 we did; we were taxed every year on the rental value of our home. I can see some logic in that; but for everybody, not just for 80,000 people who can’t influence elections.

So is this a fair tax as Mr Cable claims? Of course it’s not. It is irrational, illogical, unworkable and likely to be ineffective. But it panders to the feelings of the large number of people in this country who are jealous of the success of those that have chosen to work harder than they do. So I can see why Mr Cable might espouse it!



ROBERT MAAS

BLOG 123


WHAT IS THE VALUE OF SOMETHING THAT CAN NEVER BE SOLD?



Value for tax purposes normally means market value. The generally accepted definition of market value, based on a succession of court cases, is the price that would be paid between a (hypothetical) willing seller and a (hypothetical) willing buyer on a sale in the (hypothetical) open market. It is for the valuer to judge what price would be acceptable to a willing seller, who the likely willing purchaser might be and the price that he might be prepared to pay, and how the non-existent-in-reality open market would function (although the courts have given some guidance on this). But what if there is a legal restriction on selling the item? The courts have said than an assumption must be made that it can be sold but that the purchaser would take it subject to the legal restriction on reselling it.

What if it would be a criminal offence to sell the item? As far as I am aware the UK courts have not yet had to grapple with this. Can there be a hypothetical willing seller at all? He would be a person who knows that if the sale comes to light, he will go to jail and in addition the entire sale proceeds will be confiscated under the Proceeds of Crime Act. Take for example a quantity of heroin. Who would buy it? In theory a major drug dealer, but could a willing seller find one and wouldn’t he be taking a huge risk that rather than pay anything the willing buyer might simply shoot him? So who is this hypothetical willing seller? And if he does indeed exist, wouldn’t he want so much money to compensate him for the risks he is taking that there would not be a willing buyer at such a price?

I have been musing on this dilemma after reading an article from Forbes magazine on the estate of the late Ileana Sonnabend. Ms Sonnabend was described by Forbes as the “legendary modern art dealer”. She has left her executors with a major headache. She owned a work of art called “Canyon” by Robert Rauschenberg. This is a collage. Unfortunately it incorporates a stuffed bald eagle. It is a criminal offence in America to sell a bald eagle under the Bald and Golden Eagle Protection Act 1940. Ms Sonnabend knew she could never sell Canyon”. That was OK; she didn’t want to sell it. She had to get a permit even to keep it. To do this Mr Rauschenberg had to sign an affidavit that the bald eagle had been stuffed before 1940. All that Ms Sonnabend was permitted to do with the artwork under her licence was to gift or lend it to a US art gallery. She could not even loan it to an overseas one, as it was illegal to take it outside the US.

Three separate art appraisers have told the executors that “Canyon” is valueless as all that the owner can do with it is gift it to a US art gallery. The IRS disagree. They say, apparently, that the executors should be able to find a reclusive Chinese billionaire who would buy the artwork on the black market and smuggle it out of the USA in order to hide it away. The executors say that they don’t want to go to jail so would not contemplate such a sale, even if the Chinese billionaire actually exists – and the IRS have not put forward anything to suggest that he does.

The upshot is that the IRS value the artwork at $65million. Ms Sonnabend did not even seek to avoid taxes. Her estate has paid $471million in estate taxes. However the executors think that a demand for an extra $29million for something that can never be sold to pay the tax is unreasonable. Rubbing salt in the wounds, the IRS is apparently also seeking a $11.7million penalty for “gross valuation misstatement” in accepting the unanimous view of the three separate professional valuers that the artwork had a nil value!

Could it happen here? I hope not, but don’t have much confidence that it can’t.




ROBERT MAAS