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Securities and taper relief
Readers will recall the concern that the term 'securities' in the Taxation of Chargeable Gains Tax Act 1992 was not quite as wide in its scope as had been thought, and that the Finance Act 2002 has remedied this by providing that section 251(6) (which deems certain debentures to be securities for some capital gains tax purposes) also applies for taper relief purposes.
Securities and taper relief
Readers will recall the concern that the term 'securities' in the Taxation of Chargeable Gains Tax Act 1992 was not quite as wide in its scope as had been thought, and that the Finance Act 2002 has remedied this by providing that section 251(6) (which deems certain debentures to be securities for some capital gains tax purposes) also applies for taper relief purposes.
This is helpful, for example, on a takeover: where a loan note is issued that is not a qualifying corporate bond, the note will usually count as a security and may qualify for business asset taper relief. But one needs to be slightly careful as to the effect of the extension of the definition. Although pretty well any loan note will count as a debenture, section 251(6) conspicuously does not provide that every debenture is automatically a security - broadly, it applies only to debentures that are issued on a reorganisation. Hence, the purchaser of a 'secondhand' loan note will not necessarily be entitled to business taper relief - it will depend upon whether the loan note is a security under the general case law tests. In many cases, such a loan note will be a security under these tests, but not always. It pays to keep a clear head!
David Whiscombe,
Berg Kaprow Lewis,
London N3.
Penalties and deceased taxpayers
An item published in Loose Ends, Taxation, 28 February 2002 at page 530 reported instructions then current in the Revenue that no tax-geared penalties should be charged in deceased estates until the Revenue's head office had issued further detailed guidance. This followed cases under human rights legislation which made it clear that imposing criminal sanctions (or tax-geared penalties) on the living in respect of acts apparently committed by the deceased, is unlawful.
It appears that the guidance has now been given, and it is to the effect that penalties will still be sought from personal representatives in these circumstances, by way of addition to the offer in settlement. However, the Revenue will, upon request, issue a side letter to confirm that the penalty will be repaid with interest in the event of an adverse court decision on the matter, or if the Revenue should change its view.
An Executor.
Business use of main residences
Henry bought his house in 1990 and sold it on 6 April 2002 for a total gain of £200,000 (after indexation to April 1998). It was his only residence throughout, but also throughout his ownership he used a workroom exclusively for his business of repairing computers. The business use fraction for purposes of principal private residence relief is agreed with the Revenue to be 10 per cent.
The computation of taper relief is: total gain not exempt - 10 per cent of £200,000 = £20,000. When apportioned for taper relief purposes, this is as follows:
* The non-business portion is 90 per cent of £20,000 = £18,000. This attracts non-business taper for five years (four years since 6 April 1998 plus the 'bonus' year for pre 17 March 1998 ownership) giving a taxable gain on this portion of 85 per cent of £18,000 = £15,300.
* The business portion is 10 per cent of £10,000 = £2,000. This attracts business taper for four years, giving a taxable gain on this portion of 25 per cent of £2,000 = £500.
* The total taxable gain is therefore £15,800.
Some might argue that this produces the wrong result. The gain not eligible for main residence exemption ought to be taken to arise on a wholly business asset which has been so used throughout Henry's ownership period. In that case, should the taxable gain not simply be 25 per cent of £20,000, i.e. £5,000? This attractive, and arguably more equitable, solution for the taxpayer is prevented by paragraph 9 of Schedule A1 to the Taxation of Chargeable Gains Act 1992. This is a case of an asset (the whole house) which has been simultaneously used for private and business purposes; it is the whole house, not just the workroom, on which the otherwise chargeable gain accrues. Paragraph 9(2) and (3) requires 90 per cent of the ownership period to have represented non-business use of that asset. 90 per cent of the otherwise chargeable gain arises on a non-business asset.
The Revenue has confirmed this interpretation.
This could have far-reaching consequences. For example: A sells an estate which, apart from the house, which is the main residence, has been farmed in hand. 40 per cent of the total gain relates to the main residence out of a total gain of £1 million. One would expect the tax to be £60,000 (10 per cent of £600,000), but if the estate is a single asset then the chargeable gain of £600,000 will be apportioned as to £360,000 for business asset taper relief and £240,000 for non-business asset taper relief.
From a recent seminar by Peter Trevett QC; this item originating from David Williams of Smith and Williamson.
