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Capital exit
Treatment of income arising from share sale.
My client is a shareholder in a special purpose company that was established three years ago to develop a property.
His shares cost £400,000 and are currently valued at £800,000. He also loaned £2m to the company. The project is nearing completion and the loans will be repaid with interest in the near future.
One of the other shareholders is interested in acquiring my client’s shares, which would suit my client because it appears to secure him capital gains tax treatment for his profit without waiting until that is possible on a share buy-back (another two years) or requiring the liquidation of the company.
I am concerned that there might be something that would nevertheless deem the £400,000 profit to be a distribution in my client’s hands or would create a tax problem for the other shareholder (which the client would not countenance).
Can readers provide reassurance, or point out the pitfalls to watch for?
Query 19,819 – Serendipity.
Carbon credit
Taxation on disposal of carbon credit offsetting units.
We have a client who has been contacted by an agent to sell carbon credit offsetting units and are unsure what the tax treatment of these may be.
The units in question are identified as non-compliance market credits which we understand HMRC to consider to be outside the scope of VAT (see HMRC manual VAT Supply and Consideration VATSC06582) but there seems to be no guidance on direct taxes.
The client is a limited liability partnership operating a commercial woodland which benefits from the income tax exemption under ITTOIA 2005, s 768 on income arising from the woodland that is not otherwise charged elsewhere.
Since there appears to be no guidance published by HMRC readily available on this subject, we are interested to know readers’ thoughts as to whether the disposal of these carbon credits would be subject to income tax, or covered by the income tax exemption under s 768?
I look forward to receiving replies from readers.
Query 19,820 – Carbon Neutral.
Pension bequest
Would fund income affect lifetime allowance of recipient?
My client is married and in his late 70s with a currently satisfactory income level from non-pension sources. He also has a pension fund in a self-invested personal pension (SIPP) currently valued at some £1.6m. It is likely that neither he nor his wife who is the same age will need to draw on this fund during their lifetimes.
Needless to say, it has gone past the lifetime allowance stage and the appropriate tax has been paid so we assume that now and for the foreseeable future, it floats free, so to speak.
Our client’s latest proposal is to try to leave a fund on the death of the survivor of himself and his wife to his currently infant grandchildren. The aim is to use their personal allowances to release income from the fund at a low rate of tax to help with education expenses and so on.
It has been suggested that the fund should be left to his children first who in turn can leave it to their children, ie our client’s grandchildren. If this has to be done in this way would the children’s shares of the fund affect their own lifetime allowance levels?
Readers’ views on how to achieve what our client wants would be appreciated.
Query 19,821 – Liverpool.
Input tax concerns
Input tax to repair an asset owned by another business.
One of my clients has agreed an unusual deal with another business. In essence, the other business has bought a prestige car for £100,000 (no VAT), which requires a lot of work on it to bring it up to a drivable standard.
My client will use the services of vehicle repairers and restorers to carry out the work; they will all invoice his VAT registered business for the labour and parts they supply. The total cost will be about £100,000 plus VAT and my client will claim input tax.
The vehicle will then be sold, it is hoped for about £340,000; the business that owns it will account for output tax on the profit with the VAT margin scheme, say £40,000, leaving £100,000 profit on the deal. My client will invoice the other business for £150,000 plus VAT, to recover the cost of the repairs he has paid for, and his 50% share of the profit.
The deal seems logical but my concern is that HMRC might disallow input tax of £20,000 claimed by my client because it relates to expenditure on an asset owned by another business. There is also the risk that the deal will not make a profit.
What do readers think about my input tax concerns? I was interested in the recent decision in Royal Opera House and the need for input tax to directly relate to VATable sales.
Query 19,822 – Royce.
