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Shareholder
We have a client who is a director and 10% shareholder in a trading subsidiary. The holding company has offered to sell him an additional 20% of the subsidiary shares at their current market value.
Our client cannot immediately afford to pay for the shares so Holdco has offered to provide him with a loan. My understanding is that a director’s loan under CTA 2010, s 455 tax will be paid by Holdco and our client will pay interest to the company on the loan at HMRC’s authorised rate.
Fortunately, the subsidiary is growing and increasing in value and the plan is to sell it in three to five years. Our client will then pay off the loan with the sale proceeds.
One concern is if the sale does not take place. Our client would not then be in a position to repay the loan. We have suggested a clause in the shareholder agreement that Holdco would, in this situation, buy back the shares from our client at the original selling price. Our client would then repay the loan and Holdco would recover the s 455 charge.
Do readers foresee any issues with this? For example, what if the share value at this time has fallen below the current selling price, in other words if Holdco is then buying back the shares for more than they are worth?
Query 19,451 – AJ.
Passing portfolio
My client is a successful housebuilder and property developer whose activities are carried on through a limited company in his sole ownership. Further, he owns a very substantial property portfolio on which he pays income tax on the net rental income.
His existing borrowings are due to be repaid so that there will be no mortgage interest relief available in the future.
My client is contemplating renting all or part of his residential portfolio to his limited company, which would in future be responsible for all outgoings, such as insurance, repairs and management.
My query concerns the level of rent that would be paid by the company to the client. Would this depend on the terms and length of any lease? He is aware that stamp duty land tax would be payable on the grant of a lease.
Our concern is whether the granting of a lease would be regarded as making a settlement of income to his company. If this is the case, what are the relevant tax implications?
Any thoughts from Taxation readers would be much appreciated.
Query 19,452 – Purple Brick.
To deed or not to deed?
One of my clients is intending to waive a dividend. I am satisfied that entitlement has not yet arisen and I am confident of the tax analysis.
My understanding is that, strictly, a dividend waiver must be effected by a deed because a contract requires consideration and there is no consideration for a waiver. I also understand that to be valid, a deed must be prepared by a lawyer.
I assume that I cannot prepare the document and give it to the client for signature, but could I write a letter to the client along the lines of ‘here is some wording to use if you are considering waiving a dividend’? I am sure that in the past many non-lawyer advisers will have prepared waivers for their clients to sign.
Has anybody any experience of this creating problems, such as HMRC challenging the effectiveness of the waiver or the preparer being disciplined by a professional body? In reality, is this only a theoretical problem?
I have struggled to find the legislation which says that a waiver must be executed as a deed. All the sources I have examined tend to state the rule without explaining where it comes from. I have also looked at the recent model articles (tinyurl.com/ybp7o5cr) and they merely say that a waiver must be ‘in writing’, but say nothing about a deed.
Dividend waivers are very common and I am surprised that there appears to be no straightforward definitive answer on this point. Can Taxation readers help?
Query 19,453 – Stevie.
Grouping
We act for a client that has had a VAT group registration in place for some years now.
The client incorporated a new company and began trading through it on October 2017. There were some delays in getting the new company VAT registered and this did not happen until April 2019, but the registration was backdated to October 2017.
Our client then proceeded to have the company included in the VAT group. This was successful, but only from March 2019 when HMRC received our application. We requested they be part of the group from October 2017.
From a VAT perspective, the client has included the new company within the group VAT returns from the start of trading because the intention was that it would be part of the group registration – they simply overlooked preparing the forms.
The issue we have is that if HMRC is only allowing the company to be part of the group from March, there is a historic issue with management charges between the company and the VAT group as they recharge costs.
Do readers think that we can persuade HMRC to agree a backdating to October 2017? If not, what is the best course of action? HMRC is not chasing a VAT return for the initial period for the new company because the client told them it should be nil.
Query 19,454 – Bolted Horse.
