Capital taxes, VAT, income tax & pension….
Hello again, dear reader. I have neglected you, for which I apologise. My animals and vegetables (but not my minerals) have been occupying too much of my time, but I have managed to do some tax work between feeding pigs and hoeing carrots. Here are a few examples of what I have been up to.
Let’s start with something that most people (but not tax advisers) would consider to be in bad taste. A client and his wife own an investment company on a 50:50 basis. They have a son and a daughter who now run the company and to whom they would like to transfer their shares. However, there are difficulties with capital taxes. A straightforward gift of the shares to the children would be a potentially exempt transfer (“PET”) for inheritance tax (“IHT”) purposes, but would only be fully exempt IHT if they survive the gifts by 7 years and would not qualify for any relief from capital gains tax (“CGT”). Thus, as the shares are pregnant with gain, a large CGT liability would be triggered and IHT may also be triggered if the parents die too soon. The shares could be channelled to the children via a trust; in that case the CGT liability could be deferred using hold-over relief, but a chargeable transfer for IHT purposes would be triggered.
It transpires that the father is quite ill; his life expectancy is much less than 7 years and possibly less than 18 months. In a ghoulish way, that presents an opportunity. Mother could gift her shares to father so that he owns 100% of the company. Such a gift, being between spouses, would be exempt CGT and IHT. Father could then bequeath all the shares to mother under the terms of his Will. Such a bequest would be exempt IHT, and for CGT purposes mother would have an uplifted base cost to the then market value of the whole company, so that the shares would no longer be pregnant with gain. Mother could then gift the shares to the son and daughter as a PET for IHT purposes and without triggering a gain for CGT purposes. Providing mother survives the gift by seven years (which seems likely), the shares will have been passed-on to the children free of all taxes.
Slightly surprisingly, the family (especially the son and daughter) think this is a splendid plan. Additionally, it transpires that mother owns an investment property that she would like to sell in due course, which is also pregnant with gain. A gift to husband and a bequest back will also wash-away that gain!
On the topic of families, what can you do when there is a falling out? An elderly client is worried that some previous, half-implemented planning might cause her terrible grief. Her house was transferred into a trust of which she is the sole remaining trustee (not an ideal situation!) and of which she is the life tenant. The principal reversionary beneficiary is a child, whom she wanted to provide for, but who has now gone off the rails. Other beneficiaries are that child’s children, grandchildren etc. The child believes (wrongly) that she has “rights” in respect of the house and is making threats towards the client (her mother). What can be done?
The first thing is to read the Trust Deed. The client is pleased to hear that she has various powers under the terms of the trust. One power, as the trust’s Settlor, is a power to add or remove beneficiaries. Another power (as trustee) is to appoint, at her discretion, assets to any beneficiary (including herself). The solution is straightforward. First, the troublesome child and her family can be excluded as beneficiaries; next, more helpful/deserving members of the family can be added as beneficiaries; and finally, the house can be sold (to enable the client to down-size) and the sale proceeds can be appointed to her so that she can deal with the money in whatever way she wants without the constraints of the little understood trust. The client can once again sleep at night!
A client intends to purchase a property, for the purposes of a trade conducted by it. Actually, the trade is conducted by another group company; the property is to be acquired by the group entity that holds all of the group’s property assets. The vendor has “opted to tax” the property for VAT purposes and so will charge VAT on the purchase consideration. That will be some £300k of VAT, and stamp duty land tax (“SDLT”) at 4% will charged on the VAT inclusive amount. The SDLT on the VAT (tax on tax!) will be £12k! Ouch!
But must the vendor charge VAT? The vendor is a property investor and the purchasing entity is also a property investor, albeit for the group. The tenant/occupier of the property will not change. As such, surely this is the transfer of a business as a going concern (“TOGC”), which means that VAT need not (indeed, must not) be charged. For the TOGC rules to apply in these circumstances, the purchaser must “opt to tax” the property before it is supplied to him, which means before a deposit is even paid. There is no time to lose and a suitable election is made and notified to HMRC’s Option to Tax Unit. The result is that no VAT need be paid/recovered, which is good for cash-flow, but because no VAT is chargeable, the SDLT liability is reduced by £12k, an absolute saving. Another happy client!
On similar lines (i.e. VAT lines), a client, who is converting a property (basically creating three flats which are to be held as investments) telephones to moan about the way the VAT costs that the building work is attracting are causing issues with his cash-flow and his financial planning. Why can’t he register for VAT and recover the VAT, he asks? I explain about exempt supplies and the fact that residential units cannot be “opted for tax”. Thus, the input VAT that he is incurring is simply not recoverable.
However, I am puzzled about the numbers that he quotes to me, as the VAT does seem very high. I say that surely the builder is only charging VAT at the reduced rate of 5%, in view of the fact that new residential units are being created out of what was previously a single unit. He tells me that no, he is being charged 20% VAT! The solution is simple (in theory) – he needs to insist that the builder charges VAT at the correct rate and refund to him any amounts overcharged. The builder seems oblivios of the rules, so I send his accountant chapter and verse on the rules concerning the 5% rate of VAT and all works out in the end.
An interesting case concerning the interaction of the new rules on pension drawdown and the old rules on making IHT exempt gifts out of income.
A client has a large(ish) pension fund and is on the cusp of age 75. He is aware that he need no longer buy an annuity at that age, but is also aware that any amount undrawn from his pension pot will attract punitive tax charges – what were previously possibly 82% charges are now no longer quite so outrageous, but are still set at an eye-watering 55%. What should he do?
A straightforward solution is for the client to avail himself of the rules concerning flexible drawdown. If he has guaranteed pension-type income of £20k per annum (which he has), he can then draw as much as he likes from the fund, but it is charged to income tax. If he can ensure that the average rate of tax on such drawings is “reasonable” (say 30%) he can swap 55% tax for that rate, subject to managing any consequential IHT liability on the money drawn. If the income drawn is surplus to his immediate requirements, he can gift the surplus to a life-time gift trust, such gifts being completely exempt IHT. To make the trust “work” for various tax purposes, he will have to be excluded from benefitting, but his widow (not his wife, for complicated income tax reasons) can be a beneficiary.
All in all, a sensible solution to a thorny problem.
So, its Wimbledon fortnight and we are now enduring the wettest draught in recent memory (almost as wet as a recent barbeque summer). Classic English weather; thank heavens I’m off to Provence next week.
And so to bed…Talk to Barnes Roffe today