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How can clients avoid paying large IHT bill immediately?
A brother and sister are equally entitled to the residue of their parents’ estate. This includes a property worth around £2.7m, with an equity release loan currently owed £1.1m. Inheritance tax of £350,000 has been deferred under the instalment option for property. The sister would like to keep the property and the brother would like to sell. The sister is working out options for settling with her brother.
IHTA 1984, s 227(4) requires that, where there is a partial sale of a property subject to payment of IHT by instalments, the proportionate part of the tax will be payable immediately. However, is the property really being sold? Is there an argument that the daughter is lending funds to the estate to settle the son’s share of the property and she will then take on the existing debt and the property in return for the loan?
Is there a way to structure the appointment of the property which would not trigger the requirement to settle the tax?
Query 20,411 – Passerine.
Time limits to amend returns.
Our new client is the widow of a deceased company director and shareholder. The company was wound up by Companies House some time ago. Self-assessment returns for the three years to 5 April 2021 were filed for our client without her knowledge, declaring salary and dividends which she never received and, indeed, she took no part in the company’s activities.
I have suggested to HMRC that the settlements legislation implies that the now deceased husband should be assessed for the dividends but the department’s response (from a ‘taxes technician’) was that it is too late to amend tax returns for those years and that the time limit for over-payment relief is four years.
What is the best response to this:
- refer HMRC to its own manual;
- quote its examples;
- request an internal review; or
- use the latest disclosure facility in respect of the husband’s tax returns?
I should be grateful for readers’ guidance.
Query 20,412 – DW.
Were repair costs capital expenditure?
Our client is resident in Guernsey but has UK property so submits returns in both jurisdictions. The property consists of a block of flats over 11 retail units. The retail units are owned by a non connected company. The lease has a repairing clause which indemnifies the retail units from damage caused by the flats above. Over a period of time water ingress from the flats resulted in serious damage to the units. This only came to light when a health and safety visit forced one of the businesses to close due to a dangerous electrical system caused by the water ingress. The company took action against our client for lost rents and repairs. The eventual settlement cost our client £80,000.
In 2021 Guernsey raised a query in relation to the claim and an explanation and documentation was provided. Guernsey disallowed the expenditure on the basis that it was capital. We queried this on the basis that no new asset had been brought into existence and the property was merely being restored to its original state plus the costs incurred by the company in the way of lost rents. The Guernsey authority merely sent us a printout from their manuals which was no help and merely said that some expenditure could be capital. We asked for the reasoning behind the bold statement that it was capital. Despite many phone calls, etc since then, we can get no response from them. We would welcome views on the issue itself and also how to move this forward both with the UK and Guernsey authorities.
This has been going on for three years and is causing great stress to our client.
Query 20,413 – Bailiwick.
Can different apportionment methods be applied?
One of my clients manufactures goods – let’s call them product A and product B – and sells them on its website to private individuals either separately or as a single package. In other words, customers can buy a single package for a single price that includes both A and B or – alternatively – just buy A or B on their own.
The issue that has arisen is that A and B have different VAT liabilities – A is zero rated and B is standard rated – and my client has always apportioned output tax on the mixed packages according to the total costs incurred in making each item. However, she has now realised that an alternative apportionment method based on the retail price of each item when sold on a stand-alone basis produces a lower output tax liability on each sale.
I am comfortable about using the new method moving forward but can my client adjust output tax on past sales on their next return, ie treating the previous cost method as an error? The total VAT overpayment for the past two years since the product was first made would be £9,200, ie less than the error disclosure limit of £10,000? I know that HMRC recently changed its policy about mixed supplies, which might be relevant?
Query 20,414 – Juggler.
Queries and replies
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