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Losses on loans in an estate.
We have been asked to look at a tax issue relating to a deceased’s estate, whereby the first spouse (our client’s father) died intestate in 2016 and the assets of his estate included a claim for a director’s loan balance of £410,000.
A deed of variation was made by the six children within two years of the date of death, under which all of the assets were left to their mother.
The mother also died intestate in 2019 and the claim for the director’s loan balance was still unresolved at this time; accordingly the claim for this amount passed to the personal representative of mother’s estate.
In 2020, a distribution in respect of the director’s loan balance was made from the liquidation of the husband’s company in the sum of £140,000. Ordinarily, a capital loss in the sum of £270,000 has been crystalised but can the personal representative claim this loss against sales of other property? It would appear not from our reading of TCGA 1992, s 253 (3)(b).
What are readers’ thoughts on this?
Query 20,063 – Spooky.
Will compensation payment be tax free?
My client is a manufacturing business. Recently a factory worker had an accident at work which has resulted in him not being able to stand up all day to work on the production line. The company doesn’t want him to lose his job and wishes to give him a role which will involve lighter duties such as some admin, light cleaning and maintenance.
The pay rates for that role are much lower than for the previous production line role. The client’s financial director (FD) has suggested that a lump sum payment could be made to the worker free of tax as a payment on account of disability (ITEPA 2003, s 406(b)). Although the employment is not being terminated there is a change in duties. My initial view is that the FD is right but I am concerned that the lump sum is essentially an advance payment of salary to compensate for the fact that the new role is in a lower pay band.
Do other readers have experience of HMRC’s view of such payments?
Query 20,064 – Cautious.
Emigration plan a spanner in the works?
I act for the shareholders of X Ltd. These are Mr A (40%), Ms B (40%) and Ms C (20%). There is a single class of ordinary share and none of the shareholders are related to each other or otherwise connected.
They are in the process of selling X Ltd to a quoted company and an offer has been made for the shares to be satisfied by a small amount of upfront cash with the balance payable over a number of years via loan notes. These would be for a fixed amount and would not be dependent on the future profitability of the company.
Ms C has told me that she plans to move abroad permanently after the disposal on medical advice as she will benefit from living in a warmer climate (there is no doubt that this is genuine). She would be outside the scope of UK CGT when the loan notes were redeemed (I’ve warned her about the tax charge if she were to come back to the UK within the next five years). I’m not advising on the taxation of the redemption in the country to which she is moving, but I understand that in many countries the redemption of the loan notes would be treated as the repayment of a debt and not taxable.
Mr A and Ms B are concerned that Ms C’s emigration plans would mean that HMRC would deny clearance for the proposed transaction as a whole and would mean that they would be taxable upfront on loan notes as well as on the cash. I’ve told them that Ms C’s emigration plans are a material fact which needs to be disclosed in the clearance application.
Is there any chance that HMRC would grant clearance in these circumstances? Ms C has been involved in the detailed negotiations for the sale and the vendor had no knowledge of her emigration plans when it structured the offer as a mixture of cash and loan notes.
What is the likelihood of clearance being granted?
Query 20,065 – Concerned.
Is fee paid to farmer a subsidy or a supply?
I act for a farmer who has recently signed a lease agreement with an organisation which relates to land that he owns and uses for arable purposes.
The lease states that my client will continue to farm the land and produce food and crops at a profit but he must use ‘green friendly’ farming techniques. My client will receive £40,000 a year from the organisation as ‘rent’ for the ten years.
My question concerns VAT: is this income classed as a subsidy (not subject to VAT) to help my client pay for the extra costs he will incur with the changed nature of his farming techniques? Or is the payment exempt from VAT as rent or – if my client has opted to tax the land in question – possibly standard rated? If the answer is that it is a non-VATable subsidy, will my client have to apportion input tax between VATable and non-VATable costs incurred on the land in question?
Query 20,066 – Farmer Giles.
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