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Income tax
Tax consequences of unexpected rent entitlement.
My client has a part share in land. His co-owner rented it out for a small sum to cover expenses, and my client said he had no interest in receiving a peppercorn balance. I was unaware of this arrangement, but if there was an underdeclaration of an entitlement to rental income, it would be trivial.
He is now getting divorced, and has discovered that the co-owner relet the land at a significantly higher rental three years ago and did not tell him. There is now a possibility that he will have to make a claim against the co-owner for three years’ share of £9,000 a year, because his wife is claiming her share of it from him.
Could readers assist on whether he should make a disclosure of the entitlement while he argues about it? And is he liable for income tax on the rent even if he never recovers it?
Query 19,963 – Stitched Up.
Capital gains
Residential element on the disposal of a let cottage.
I want to determine the residential element on the disposal of a let cottage which was part of an inherited farm.
I read Michael Blake’s article ‘Peculiar entities’ (Taxation, 3 November 2016, page 12), which asks ‘what is the asset?’ and I direct readers to HMRC’s Capital Gains Manual at CG71800, which states: ‘A single acquisition of land, with or without buildings, whether by purchase, gift or inheritance, should normally be regarded as the acquisition of a single asset for capital gains tax purposes.’ So, the disposal of the let cottage is a part disposal of the farm, although this can be abandoned if advantage is taken of statement of practice D1 – fictional separate asset basis.
Michael’s article also mentions that, in the context of the old taper relief provisions, if statement of practice D1 was adopted, HMRC would consider only the use to which the part disposal had been put in deciding whether relief was due at the business or non-business asset rate.
If a part disposal route is followed, does this mean that the capital gain made on the cottage has a commercial element so that the lower rates of capital gains tax apply? What about the position on a future sale of the land, which has previously included the dwelling? Would there be an element of a residential property gain?
What do readers think?
Query 19,964 – Unsure.
Stamp duty land tax
SDLT with multiple dwellings and link transaction.
My client is buying three titles (small land, outbuilding and main residence) from the same seller.
Consideration for the small land and outbuilding is £305,000 and for the main residence is £1.1m. The exchange date for all three titles is the same but the completion date for the main residence is by September 2022, which will be the same time as the completion date on his current main residence, which exchanged in March 2022.
My client was told by the seller that my client can split the value of the small land and outbuilding in whatever way my client chooses.
I have advised my client to make the land value to £150,000 up to the non-residential (NR) threshold and the remaining to the outbuilding, resulting in an SDLT saving from £5,250 to £600 assuming the outbuilding is a subsidiary of the main building (ie no higher rate of SDLT for additional dwelling).
I am concerned that as the purchase of the small land and outbuilding is a linked transaction, a total of £305,000 might be charged on NR rate, losing the NR threshold benefit. Or is there any other way of saving SDLT?
Readers’ views would be very much appreciated.
Query 19,965 – Adviser.
VAT registration
Are fees charged a sales lead or medical service?
One of my clients trades as a top-ranked psychologist and her fees are exempt from VAT, so she has never registered for VAT. However, she changed her business model last year and I wonder whether she has created a potential VAT problem.
The basic situation is that she now refers any new work to a team of five self-employed psychologists and, for these referrals, the psychologists increase their usual fees by £60 an hour and give this amount to my client for the referral as a pseudo commission. My client says this fee is also exempt from VAT because she always gives the chosen psychologist a basic analysis of the client’s problems, and a potential treatment solution, when she passes on new clients, ie there is a direct link to a medical service. But after this initial analysis, my client does nothing other than collect her commission. In some cases, the commission might last for many years, depending on how many consultations the client needs.
This issue has not been relevant to date because the commission has never exceeded the annual £85,000 registration threshold until now. Do readers think that the income is exempt or standard rated?
Query 19,966 – Pavlov.
