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How should couple be taxed on business incorporation?
Since the introduction of the restriction in mortgage interest relief, many buy-to-let individuals have incorporated their property portfolio.
I understand that to qualify for incorporation and SDLT relief it is necessary for the property portfolio to be run as a business and SDLT relief is available to a partnership.
A new client who owns a substantial property portfolio (of over 20 properties) with his wife wants to explore incorporating the portfolio. Currently, they declare the rental income directly on their tax returns and they do not file any partnership returns.
I am satisfied that they are running a partnership business as both actively manage the portfolio and easily spend over 20 hours each week on this.
My question is: should they be filing a partnership tax return to support their case if they decide to go ahead and incorporate and, if so, are they liable to class 4 National Insurance contributions?
The current portfolio value is £5m, the loans secured on the properties are £3m and the capital gain is £2.5m.
My understanding is that the gain arising is deferred by being deducted from the cost of the new company shares which is treated as the market value of the company.
In this client’s case, am I right in thinking that the market value of the company is the value of the portfolio less the loans, ie £2m – as the gain is £2.5m there is an immediate capital gains tax charge on £0.5m.
I have also seen lots of commentary on the application of ESCD32 and that this covers the loan position so that the repayment of the loans is not treated as additional consideration – has anyone seen this challenged by HMRC?
Query 20,315 – Barry.
How would trust legacy be dealt with?
A prospective client’s husband died last month. He owned shares in a trading company for more than two years at the date of death so business property relief should be available. His will leaves ‘property eligible for business property relief’ in trust with the remainder of his assets passing to his spouse. The company is currently sitting on £3m in cash and we have not yet carried out a valuation of the company for probate purposes, but the question raised is that if HMRC disallowed BPR on all or some of the cash, how would the trust legacy be dealt with?
Is it possible to transfer 75% of the husband’s shares into trust if HMRC decided that 25% of the company value does not qualify for BPR, or does the whole gift fail on the basis that it is not possible to separate out the non qualifying asset from the value qualifying for BPR?
Query 20,316 – Terry.
What are the tax consequences of parents’ retirement?
I act for a farming partnership comprising of Father (F) aged 84, Mother (M) aged 81, Son (S) aged 54 and Daughter (D) aged 52. According to the partnership agreement the revenue profits and rents are divided equally with capital profits shared equally between the S and D only.
The home farm is owned by S and farmed by the partnership under licence. The partnership is to cease trading later this year when the farm will be let under an FBT with S and D remaining in the farmhouse.
Several pieces of land have also been purchased by the partnership over the years and included in the land capital account. At least six of the properties are let under FBTs with one subject to an AHA tenancy which only attracts 50% relief. Apart from one farm in four names, the legal owners are S and D.
I am suggesting that F and M retire from the partnership this month. F would transfer his share to M, who has a longer life expectancy. M will then transfer her current account and her share in the land property account to S and D.
What are the tax consequences of the parents retiring from the partnership?
- Will the share of the land capital account be transferred at original cost for IHT and CGT purposes?
- If M fails to survive the seven years from the date of the gifts, will the current APR and BPR rules apply?
I am concerned there may be a possible future change in legislation affecting FBTs and BPR. Although the intention is to continue to own the land contained in the land capital account for at least the next seven years, the interest in the farm current year will no longer exist.
Query 20,317 – Farmer Fred.
Is there a timing error with VAT paid under margin scheme?
I think that one of my VAT registered clients has made a timing error in accounting for VAT on the sale of a painting with the second-hand margin scheme for works of art.
He paid £50,000 to a private seller in April last year to purchase the painting and then found a buyer in June who paid a non-refundable deposit of £60,000 for the painting. The buyer paid a further amount of £55,000 in August when the painting was delivered to his mansion, and the final balance of £55,000 was paid on 6 October. My client completes calendar quarter returns and accounted for output tax of £20,000 on his December return (ie £120,000) profit margin x 1/6. However, I understand this is incorrect? If so, do we need to do an error correction disclosure to HMRC to adjust the VAT into the correct periods? My client’s annual turnover is £700,000.
Query 20,318 – Turner.
Queries and replies
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