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New queries, issue 4612

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15 August 2017

Issue: 4612 / Categories: Forum & Feedback

Unequal beneficiaries; Buy and sell; Sale commission; Domicile decision

Unequal beneficiaries

Establishing the nature of trust capital subject to income tax.

I have an old interest-in-possession trust and an estate, both of which are part of a large development project in receipt of overage payments linked to the sales price of each property.

The landowners took advice before exchanging contracts. Counsel’s opinion was that there was no expectation that any overage would become payable (hence no adjustment was included in the capital gains calculations for this) and if any overage were to be paid in future, the landowners would be liable to income tax on the full amount received under ITA 2007, s 756 (which was repealed in July 2016 and replaced by s 517A-U).

The beneficiaries of the estate are the deceased’s son and daughter, who are also life tenants of the trust. However, the settlor was an old-fashioned farmer and he created the trust so that his son and daughter receive 50% of the income during the daughter’s lifetime.

After her death, the trust capital vests absolutely to the son (or his male children if he dies before his sister). In addition, the trustees have the power to appoint a maximum of 50% of the trust capital for the son’s benefit during his sister’s lifetime; there is no such power
of appointment in respect of the daughter.

For the purposes of the trust accounts and estate accounts, are any receipts in respect of overage capital or income? If these are capital, but deemed to be income for income tax purposes, should this deemed income be split 50:50 between son and daughter and included on the relevant R185 (trust income) and R185 (estate income) to be included on their personal tax returns?

Also, would the life tenants be entitled to receive the trust’s share of this deemed income?

I look forward to Taxation readers’ help on these matters.

Query 19,035– Farmer.

Buy and sell

Extent of entitlement to entrepreneurs’ relief for two property companies.

I have a client who is a director and shareholder of an investment company that buys property to rent out.

He is thinking of forming another company with a view to buying a property, renovating it, and then selling it at a profit.

He then plans to liquidate the company and pay 10% capital gains tax with a view to taking advantage of entrepreneurs’ relief.

My question is whether he would be entitled to this relief, bearing in mind that he is involved with another property business.

Furthermore, would it make any difference if his company rented out commercial property and this new company renovated domestic properties?

Could readers assist?

Query 19,036– Company Director.

Sale commission

Are estate agency services exempt from VAT?

I act for an estate agent who has just earned a commission of £55,000 plus VAT for arranging the sale of a property valued at £2.5m.

He charged VAT on his commission but the seller has now said that this fee should be exempt from VAT because the property deal was carried out by a transfer of shares in a limited company that owns the property, rather than an actual transfer of the property between seller and buyer. Is this correct?

If so, should my client issue a VAT credit to the seller? And should he correct the overcharge by submitting a VAT652 error correction form to HMRC because the output tax of £11,000 was included on his last VAT return and the error exceeds £10,000?

Finally, how will it impact on my client’s input tax position if he now has a source of exempt income for the first time?

I look forward to receiving Taxation readers’ thoughts.

Query 19,037– Estate Man.

Domicile decision

Tax advantages and disadvantages of a US citizen applying for a UK passport.

My client is a US citizen but has been a long-term resident of the UK for many years. She comes within all the rules relating to deemed domiciles for inheritance tax and such like.

The client is now considering whether to apply for a UK passport, but she will not seek to renounce her US citizenship. As far as I am aware, none of her other circumstances will change as a consequence.

My question is whether HMRC would consider that the application for a UK passport is strong evidence of the client having acquired a domicile of choice in the UK?

Further, are there any beneficial or detrimental tax aspects of becoming UK domiciled in fact, rather than simply being treated as having a deemed domicile?

It would be good to have such information to hand so that I can advise the client on whether proceeding with
the citizenship application would be a good idea as far as her tax affairs are concerned.

I look forward to hearing from readers on this issue.

Query 19,038– Dunedin.

Issue: 4612 / Categories: Forum & Feedback

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Tax tip: Negligible value claim in a client’s tax return Readers’ forum: How can clients avoid paying large inheritance tax bill immediately? Readers’ forum: Time limits to amend returns Readers’ forum: Were repair costs capital expenditure? Readers’ forum: Can different apportionment methods be applied?

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