New queries: 20 July 2023

17 July 2023

Issue: 4897 / Categories: Forum & Feedback

Declaring rent on returns.

Mrs O is a director and shareholder of O Ltd. She has signed a five-year tenant repairing lease on an office in her own name. O Ltd pays the rent of £1,000 a month as well as the insurance and any repair costs relating to the office.

Mrs O decided to convert the upstairs floor of the office into a residential flat. The landlord agreed that she can do this and O Ltd paid for the conversion of the upper floor to a flat at a cost of £20,000.

First, should the £600 rent which is now being received for the upper floor flat be declared on Mrs O’s personal income tax return rather than the corporation tax return of O Ltd, which appears to be paying for everything?

Second, if the rent can be shown on her tax return, does Mrs O owe the company £20,000 for the conversion costs?

Third, is the rent of £1,000 a month paid by O Ltd allowable in the company accounts, even though the lease is not in the company’s name?

Finally, is the £20,000 conversion cost a leasehold improvement and therefore not allowable in the accounts of O Ltd?

I hope Taxation readers can advise on these points.

Query 20,175 – Landlord.

Consequences of selling property at an undervalue.

I act for a family of six, mum (M), dad (D) and four adult children. They have, for many years, been close friends of Doris, who has little family of her own. Doris passed away in September 2022 leaving an estate of circa £1m, on which there was an IHT liability of £150,000. In Doris’s will, which was made three months before her death, there are several specific legacies, including some of equal amounts to the four adult children, with the residue going to M and D.

There is a clause in the will granting one of the adult children, Bob, a ‘12-month option to purchase my property situated at […], the price for which may be fixed at £300,000.’ Would the word ‘may’ be of any significance?

The probate value of this property was £370,000. Would there be a CGT loss to the estate, or would it be considered as being otherwise than by way of a bargain made at arm’s length? My concern here is that Bob was close to Doris and has benefitted more than his siblings, so Doris might be seen to have intended giving Bob some gratuitous benefit.

If the market value rule applies, presumably that will be the value as at the date Bob buys the property, which is likely to be higher than the probate value, even if Bob still pays the lower option price? Would Bob’s CGT acquisition cost be £300,000 in this case, or the higher probate or market value?

Another concern is that if the property is sold by the estate for £300,000, mum and dad as the residual beneficiaries will have lost £70,000, and the estate has paid IHT on that same amount. Would a possible solution be to consider entering into a deed of variation, leaving a £300,000 share in the property to Bob, and a £70,000 share to mum and dad?

Query 20,176 – Haunted.

Tax approach to transfer of value between joint owners.

I have a new client who jointly purchased a house with his son for £340,000 some years ago with my client contributing £120,000 and his son contributing £220,000. This is the son’s main residence and is now worth £1m.

A few years ago, a declaration of trust was put in place to confirm the ownership position. The declaration of trust states that: ‘The parties declare that they are holding the property and net proceeds of sale and net income until sale upon trust for themselves as beneficial tenants in common as follows:

The parties covenant with each other that in the event of the property being disposed of the proceeds of sale shall be calculated as follows:

Agreed sales price less:

a. Legal and estate agents’ charges upon sale.

b. Remaining money after above deductions split between the parties in the following shares: i) as to £220,000 to son; ii) as to £120,000 to father; and iii) remaining money after above deductions to son.’

It seems that the father’s beneficial share is restricted to his original investment of £120,000 irrespective of the value of the property and the son benefits from all increases in value of the property.

It seems that there has been, or will be, a transfer of value from father to son in respect of increases in the value of the property.

What is the correct legal and tax approach to this arrangement?

Query 20,177 – Sonata.

Will repayment VAT return from five years ago be repaid?

We have recently taken on a new client who exports goods and always submits repayment VAT returns. We discovered, while preparing the year-end accounts, that no return was submitted for a quarter in 2018, which showed a net repayment of £20,000. As a strange twist to the tale, HMRC issued a central assessment for £15,000 in this period; it was never paid by our client but was offset against repayment returns for later periods.

We recently submitted the late return and asked HMRC to cancel the £15,000 assessment but the department has refused and only repaid £5,000. This seems harsh and contradicts HMRC’s published policy of paying ‘the right tax’. What are readers’ thoughts? Should we appeal to the tribunal?

Query 20,178 – Timed Out.