Offset your costs against your capital gains tax liability in the UK

[RVTrader]

Hello,

What legal structures are people using to offset their costs against profits and reduce their tax bill?

In terms of costs I'm talking about bloomberg, historical tick data services, computers, etc... (say around £20,000 per person per annum, not to be scoffed at)

Just been on the phone with an HMRC technical advisor (the ones you get put through after your questions are deemed err... too complicated for the first line call centre people), and he said Capital Gains were treated separately from other revenue and were ineligible for offset against taxation by either operating or capital expenses. He insisted that this applied to both sole traderships and partnerships, limited or otherwise.

Even though I explained that this business would be set up for the sole purpose of making investments with the partners' money (or the sole trader's money in the case of sole tradership) and not for the sale of any goods or services and hence, that any profit and loss would arise almost exclusively from capital gains/losses he didn't think that made any difference.

Perhaps tellingly he also said he didn't understand how such an arrangement (partners pulling capital together to trade) could be deemed to be a business.

Anyway, would be great to hear what other people have done in this regard before I go talk to some professional services people.

All the best
RV

 

[donaldduke]

what he said regarding capital gains tax seems to be correct, you can only offset losses and commisions when calculating your net gain for the year. you cant offset data fees and bloomerg etc from your cgt bill.

regarding limited companies.

if you told him you are making 'investments', a limited company doing that would then be classed as a close investment-holding company .

the rules for such companies are different to normal limited companies as they are deemed to not be carrying on a commericial trade and will have to pay top rate 28% corporation tax and not be able to offset expenses.

your limited company would need to be 'trading' not 'investing'.

 

[RVTrader]

Interesting, I was using the phrase "making investments", thinking it would be treated more kindly in this environment than "trading". The reality, of course is that we'll be trading, (though it would be useful to see the definition used to make the legal distinction) . So are you saying that if I change my wording to "trading" there will be a legal structure where I can deduct these general costs from my capital gains?

Sorry I'm not sure I completelly understood your post...

 

[donaldduke]

You need to take professional advice to make sure what you are doing is trading or investing. It is a grey area and if hmrc dont agree with you then it will be up to the independant commisoners/tribunals and courts to decide.

I am not a tax lawyer or accountant but my understading from reading the HMRC website is that a ltd company is likely to be trading if it's profit making activities in the financial markets are 'carried out pursuant to a deliberate and organised scheme' and on a higher frequency than normal investing. The threshold for characterising whether or not a company is trading also seems to be lower than if an individual is trading.

HMRC quote the following case on their website:

In Cooper v C & J Clark [1982] 54TC670, Nourse J examined the judgement in the Lewis Emanuel case and extracted the following principles for a company:
· marketable securities, being income producing assets usually capable of increasing in value, are prima facie purchased and sold by way of investment and not by way of trade; a series of purchases and sales may sometimes, if carried out pursuant to a deliberate and organised scheme of profit-making, amount to a trade;
· it is easier to characterise a series of purchases and sales as a trade in a case where they are made by a trading entity as opposed to an individual;
· in a case of a trading entity that characterisation is more easily made where the purchases are substantial in relation to its other activities, all the more so where they are of frequent occurrence and extend over a long period of time.

Definetely worth taking some time and studying this webpage:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM65701.htm

 

[songcon]

and he said Capital Gains were treated separately from other revenue and were ineligible for offset against taxation by either operating or capital expenses. He insisted that this applied to both sole traderships and partnerships, limited or otherwise.

Even though I explained that this business would be set up for the sole purpose of making investments with the partners' money (or the sole trader's money in the case of sole tradership) and not for the sale of any goods or services and hence, that any profit and loss would arise almost exclusively from capital gains/losses he didn't think that made any difference.

Yes, the advisor provided correct information and you reported it consisely. Traderships, partnerships or limited companies provide information (tax) return to flow through your personal income tax return. Your personal income tax return has different categories of income such as: business income, capital gain . . . . the information return reports income on these categories and each one is taxed differently i.e. your $10,000 capital gain is a tax free item.

This is to help you to better explain to your tax accountant of what you want to do.
First, to provide you an example how the tax system works, just assume that in the trading partnership you also set up a counter to sell books and DVDs on investment. The gain/(loss) on this area is business income to be reported separately from the trading income.

In the US, you can elect to follow mark-to-market that helps you to deduct more for trading loss in addition to business expenses. The example attached is for day trading but also applies to active traders. Please use this article to discuss with your tax accountant to get an appropriate answer.

http://www.ehow.com/way_5678555_tax-day-traders.html

 

[RVTrader]

Thanks guys, two great links, one for UK the other for US.
I currently reside in the UK but the US rules are helpful for comparison.


DonaldDuke, looking at the HMRC link it seems that as you say, the hurdle for individuals to be considered for "trading" status is very high. The main killer is the requirement that they must "have customers who sell to them and buy from them regularly, to whom they market their services, and will quote prices for buying and selling. The prices quoted will be spread, so they can achieve profits. They make profits from moving huge volumes of shares very quickly."
Basically you seem to have to be a market maker, maybe this is for old LIFFE pit locals to continue operating dunno.
Anyhow, as you also said, the hurdle for a separate legal entity is lower and I think achievable for us.
Which type of legal entity are people using in the UK to achieve these tax efficiencies? A partnership, limited partnership, limited company or something else altogether?
Has anyone been able to achieve these tax efficiencies setting up a sole tradership as you seem to be able to do in the US? or is this too close to being an individual?