New queries: 12 December 2019

Absence makes...

I am uncertain about the details of the exemption for main residence, not least because I understand that it is being further restricted in the near future.

To be specific, my client is planning a trip around the world that may last up to a year, during which time she will rent out her house. She will return to resume occupation afterwards.

I recall that there are periods of ‘deemed occupation’ for ‘any reason’, ‘place of work’ and ‘foreign employment’; would these protect my client’s main residence exemption? Alternatively, would her extended absence and/or renting lead to an apportionment and a chargeable gain when she sells the house?

I would be grateful if readers could provide me with a clear explanation of the relationship between the rules on absence and the rules on letting.

Query 19,483 – Wild Rover.

Chargeable event

My client has recently encashed a flexible investment plan which was offered with life cover. I believe this was intended to be a qualifying life policy so that no income tax would be payable if the plan ran for ten years.

My client started the plan in December 1989 and paid £400 a month for the first ten years. At the end of the first ten-year anniversary he elected to extend the plan for a further ten years and continued to make monthly contributions of £400. At the conclusion of the second ten-year period the client elected for a nominal contribution option which required him to make annual payments of £5 for each policy segment. He did this for nine and a half years until he encashed the plan in July 2019.

The chargeable event certificates show a period of 29 years and a total gain of £225,352 over 16 segments with basic rate tax treated as paid of £45,070.

My client accepts that he did not ask for advice from his financial adviser when the plan was encashed but he seems to have inadvertently triggered a large income tax liability by getting his timing wrong by a matter of just six months.

Is the whole gain taxable because of the encashment before the end of the third ten-year period or is there some form of relief available to my client who is a higher-rate taxpayer?

I very much look forward to hearing from Taxation readers.

Query 19,484 – Life Buoy.

Vulnerable beneficiary?

I am having trouble with HMRC with regards to the effects of a vulnerable beneficiary election on a trust’s capital gains tax liability.

The clear effect of FA 2005, s 31 is to allow the trustees a full capital gains tax annual exempt amount (rather than the usual 50%), and to allow the trust’s taxable gains to be charged at 10% or 18% to the extent that the beneficiary has unused basic rate band.

For the past three years, I have made this calculation, explaining it in the ‘white space’, and HMRC has amended the return to charge all the gains at the higher rate. For the past two years, it has accepted my rejection of the amendment, but I would prefer not to have to go through the extra step.

There is a box on the return (5.14) for ‘Claim to special capital gains tax treatment where a vulnerable beneficiary election has effect – amount of relief claimed’ – but that appears to be part of a calculation of taxable gains, rather than a reduction in the tax rate. Should I be putting a tax reducer in that box, or is there a different way of persuading HMRC to apply the law?

I look forward to any thoughts on this from Taxation readers.

Query 19,485 – Baffled.

Operation

I have received contradictory advice from two VAT consultants about the way to deal with a liability error made by a client I act for in the medical services sector.

Basically, in October 2018, my client charged a patient £12,000 VAT for an expensive operation that should have been exempt. He declared this amount of VAT on his return for the period ended December 2018. He had issued a sales invoice to the patient in October 2018 after the procedure was completed (£60,000 plus VAT).

The first VAT adviser said that my client just needs to issue a VAT credit note for £12,000 with a current date and reduce the output tax on his next return by this amount. He says that the VAT payment for December 2018 was correct because VAT was still due since the invoice was issued with a VAT charge – he has quoted VATA 1994, Sch 11, para 5(1).

The second consultant said that a form VAT652 should be submitted to HMRC, as an error correction for the December 2018 period, because the VAT amount exceeds £10,000. She says that no credit note should be issued to the patient, only a letter to the patient with payment for the overpaid VAT.

Can readers please confirm which is the correct way to deal with this problem and why?

Query 19,486 – Harley Street Man.

Issue: 4724 / Categories: Forum & Feedback