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Inheritance
Surviving spouse who inherits chargeable assets.
I have never been clear on the position for a surviving spouse who inherits chargeable assets on the death of the first spouse.
For capital gains tax purposes, lifetime transfers between husband and wife are exempt, and the donee inherits the donor’s base cost. But is this the case on death, or does the probate value of the deceased’s share replace original cost? And for freehold property held as joint tenants I believe the original base cost still applies. But in the case of a joint tenancy, will probate value apply?
I look froward to advice from Taxation readers whom I hope will clarify matters.
Query 19,411– Confused.
Dilemma
Stamp duty land tax relief when dividing property.
Two professional artists P and C, who are friends but not otherwise connected with one another, own the freehold of a London property equally as tenants in common. The property has three floors which are divided internally such that P and C each have exclusive use of one-and-a-half floors.
The arrangement is not documented and no licences or leases have been entered into. P and C use their respective units as artist studios and exhibition space. Each unit has its own bathroom and kitchen but the properties are not currently used as private residences, although they may each be ‘suitable for use as a dwelling’ for the purposes of determining which stamp duty land tax rates apply.
P and C now wish to formalise the division of the property to afford themselves more freedom to deal with their respective units.
They have been told that creating two so-called ‘flying freeholds’ is commercially inadvisable. They therefore initially intended to jointly grant each other a lease over one unit each for no consideration. Unfortunately, this would trigger a stamp duty land tax charge on the market value of each lease under the exchange rule in FA 2003, Sch 4 para 5.
An alternative proposal is as follows:
- P and C grant a headlease over the whole property for no consideration to an unconnected nominee company which holds the lease on bare trust for both (under land law it is not possible for P and C to grant themselves a jointly-held headlease).
- The headlease is then divided (an assignment of one part to P and the other to C) and stamp duty land tax partition relief is claimed (FA 2003, Sch 4 para 6).
Do readers think that this would work? If so, are there concerns that FA 2003, s 75A could apply? The capital gains tax consequences have been taken into account.
Query 19,412– Artist.
Loans
Overstated interest received from previous tax returns.
Many years ago, a deceased client sold a property a portion of which was funded by way of a deferred debt to be repaid on disposal as a proportion of the sale proceeds.
Subsequently, two further loans were made on which interest has been paid on a monthly basis. One of the loans was at a fixed rate for five years after which it should have been reduced to 0.75% above the Bank of England base rate. However, interest continued to be received at the higher rate.
Consequently, at the date of death in March 2019 the loan interest had been overpaid by £8,500. The correct amount of interest has been received on the other loan.
It is proposed to complete the 2018-19 return without including any loan interest received (in the region of £2,500 for the two loans). Presumably, it is also in order to amend the tax return for 2017-18 for a similar sum and submit an error or mistake claim for earlier years.
Would such a claim be restricted to four years, and restricted to the amount actually overpaid each year? Alternatively, could the balance overpaid (and to be repaid) be offset against other interest to be received during the period of administration?
Readers’ views would be appreciated on the above or any advice on alternative ways of correcting interest received that has been overstated in previous years’ tax returns. Also, are there any other matters concerning the deferred loan that should be addressed by the executors?
Query 19,413– Overly.
Red herring?
Effect of sale of property to son at undervalue.
I have a client who owns a commercial property which he bought for £400,000 plus VAT in April 2016 and which he has rented out for the past three years with an option to tax in place.
The tenant has vacated the property and my client has now agreed to sell the vacant building to his son for £200,000 plus VAT for the son to use for his computer software business, which is trading very well. I am not sure whether the son’s business is VAT registered, although this is probably not relevant.
The reason for the reduced sale is because my client wants to do his son a favour – the son is paying for the property partly by a mortgage for £100,000 and a loan from his mother (my client’s ex-wife).
It seems pretty straightforward to me but I want to check that the sale at below market value (it is probably worth £450,000 now) will not cause a VAT problem with HMRC?
I look forward to hearing from readers.
Query 19,414– Computer Carol.
