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Capital gain
Reporting a US capital gain to UK authorities.
My client is an individual who is UK resident and domiciled. She owned an investment property in the US for many years which she sold in late April this year.
Under the so called FIRPTA regulations she suffered a 15% withholding deduction from the sale proceeds which was paid to the US Internal Revenue Service (IRS). She accepted this as the gain will be large. She will return the gain on her UK return, along with several other UK gains, and I believe she can claim a credit for the tax already paid to the IRS. There is a box on the UK return for this purpose.
She will, in due course, submit a capital gains computation to the IRS and, allowing for the 15% withheld will eventually get a small refund from the IRS (probably in summer 2023) as the 15% withheld will exceed her final US liability.
Assuming she has to, how does she report to the UK tax authorities that the tax credit she has had the benefit of has now been partly refunded by the IRS?
Readers’ views would be appreciated.
Query 19,955 – Max the Tax.
Discretionary trust
Ten year inheritance tax charge funding dilemma.
Our client is a discretionary trust whose sole asset is a 57% shareholding in a property investment company. One of the beneficiaries holds the remaining 43% and is also a trustee. The trust is a victim of its own success and faces a ten year charge next year for the first time in 30 years as a result of the continued increase in property values.
The company’s accounts are prepared under UK GAAP and reflect current market value and a full provision for deferred tax. Previous valuations of the shares for inheritance tax have included a 20% discount for lack of full control and also a full tax provision which HMRC has not chosen to dispute, but I assume this does not guarantee the same will be true this time.
The trust has no cash reserves and our only obvious means of settling the charge is to pay a dividend on the trust shares, but this will have to be grossed up to cover the dividend tax charge at the trust rate of 39.35%, which seems crazy. I think a loan or any scheme of capital reduction or purchase of shares will be caught by s 455, but I am unsure.
Do readers know of a more tax efficient solution?
Query 19,956 – Perplexed.
Compensation payments
Is a compensation receipt from a power company taxable?
We are seeing accounts coming through showing compensation receipts from power companies arising from power cuts caused by storm Arwen last autumn. Some of the receipts are less than £100 but some clients have received hundreds of pounds of compensation as power supplies were interrupted for several days in the aftermath of the storm.
We are therefore considering if these are taxable receipts received by a business. Our research has taken us to HMRC’s Business Income Manual BIM 40101 which suggests that the basic approach in establishing whether a compensation receipt is taxable is to first consider if ‘it is a receipt of the trade or does it arise outside the trade’.
The compensation payments were paid at a fixed amount of £70 for each 24 hours that power was off. Therefore, it is not linked to loss of earnings. The same compensation was payable to all customers whether they were in business or not. This leads us to think that this was a payment which was made outside the trade and therefore falls to be non-taxable?
We would appreciate any other views from readers.
Query 19,957 – Adviser.
Building project
Is a special partial exemption method needed?
One of my property developer clients has purchased a plot of land and has incurred over £200,000 of legal and professional fees getting planning permission to build a block of 35 apartments, plus ground floor commercial units.
My client has registered for VAT for this project alone and opted to tax the land. The VAT challenge is that my client is unsure whether the apartments will be sold at the end of the project or, more likely, rented out on either a long-term letting arrangement or short-term Airbnb.
My gut instinct is to claim all of the £40,000 input tax on the first VAT return because there are two potential VATable outcomes and only one exempt outcome for the flats. Also, the income from the commercial units will definitely be standard rated because of the option to tax election. But is my thinking correct?
Should my client request a special method for partial exemption purposes instead? Presumably HMRC will not be out of pocket because if he does rent out the flats to tenants who will live there, then any overclaimed input tax will be adjusted by the payback and clawback rules anyway. Or is my thinking flawed?
Readers’ thoughts would be helpful.
Query 19,958 – Speculator.
