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House in order
IHT implications of German wife obtaining UK citizenship.
My client, who is retired and is a UK citizen, has recently married a German citizen. He spends time both in the UK and in Germany, where his wife has a business and property.
The client and his wife jointly own let property in the UK as well as their owner-occupied property here.
The client’s wife is domiciled and resident in Germany, but will soon be applying for UK citizenship.
Can readers assist with the following issues?
- The current inheritance tax implications should my client pre-decease his wife if she has no UK citizenship and, conversely, if she had gained UK citizenship.
- The nil rate bands that the wife will be entitled to in both situations.
Readers’ comments would be very much appreciated.
Query 19,367– Lancelot.
One way or another
Treatment of losses for partnership on property sale.
I act for a partnership which operates from premises that were previously owned by some but not all of the partners.
The owners of the property are subject to a substantial breakage charge by the mortgage lenders on the sale of the property last year. This will create a large loss on rents for each individual during their final year of ownership.
Some of the owners have other properties, so will be able to use the losses against ongoing rental income. Others only had their interest in the property used by the partnership. However, the trading partnership receives rent from subletting part of the trading premises which is split out and reported as rent through the partnership return.
HMRC’s manuals state that rents received as a member of a partnership are dealt with separately from rents received in a personal capacity (PIM1020). This seems to contradict the requirement to look through a partnership for tax purposes and also the requirement to treat all rental income as a single rental business.
I cannot find the legal basis for HMRC’s stated view and wonder whether readers can confirm that HMRC is correct in its analysis, or do I have a legitimate claim to offset the loss against the partners’ ongoing rental income received through the partnership?
I look forward to hearing from Taxation readers.
Query 19,368– Band of Brothers.
Goodwill payment
Tax position on rectifying a void buyback of shares.
We have encountered a situation where an unlisted trading company undertook a buyback of its own shares from two non-employee shareholders approximately three years ago, but it has only now come to light that the transactions were void.
After taking legal advice, the buy-backs have now been completed properly and, because the current circumstances are different, one of the two former shareholders is now facing an income tax charge on proceeds taxable as a distribution. The earlier void buyback would have instead given rise to a capital gain covered by the annual exemption.
The company feels morally obliged to meet the former shareholder’s unexpected income tax liability.
Our question is whether the company’s payment of the former shareholder’s income tax liability can be regarded, in the former shareholder’s hands, as non-taxable – in essence, an ex gratia goodwill payment. Alternatively, could it be construed as a further payment for the shares and, if so, taxable itself as a distribution?
The second former shareholder’s tax position has not altered, but the company would still like to make some form of ex gratia goodwill payment to compensate for their inconvenience. Again, how will that payment be taxed in the former shareholder’s hands?
Readers’ views on this unusual situation would be appreciated.
Query 19,369– Anon.
Best of both worlds
Belated VAT claim for converted cottages.
My client has recently converted some barns he owns into six cottages, all of which qualify as dwellings. He started the work in June 2017 and the project is now nearing completion.
His original intention was to rent out the six properties and therefore he did not register for VAT. However, he has now decided to rent out two of the cottages as holiday lets through Airbnb, with expected annual income of £6,000 per cottage. He also plans to sell one of the other freehold cottages.
He has now asked whether he can register for VAT and claim half of the input tax retrospectively on the building materials, professional fees and builder services relevant to the project (the builder services have been charged at 5% VAT).
Somewhat cheekily, he has also asked if he can deregister once he has submitted one VAT return and claimed all of the input tax, in order to avoid accounting for output tax on the holiday let income in the future.
What do readers think about this strategy?
Query 19,370– Cottage Cheese.
Replies
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