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Insurance bond
Inheritance tax on bonds in a trust.
I am dealing with a discretionary trust, which holds an investment in an insurance bond. A partial withdrawal has been made and a chargeable event gain has arisen. As the settlor is still alive it is my understanding that the chargeable event gain will be taxed on the settlor, not on the trustees.
The amount withdrawn has been paid to a beneficiary (not the settlor), which has raised a number of questions:
- Is the beneficiary liable to income tax on the chargeable event gain? I believe not, since it has been taxed on the settlor.
- Does IHTA 1984, s 65(5)(b) mean that no inheritance tax liability can arise, since an income tax liability has already arisen in the hands of the settlor, so that there is no exit charge?
- If the point above is correct, what happens at the next ten-year anniversary? Is the transaction just ignored?
Depending on the answers to the above three questions, would the tax situation for the beneficiary, and from an inheritance tax point of view for the trust, have been different depending on whether the funds were paid directly to the beneficiary or were first paid into the trust bank account and subsequently paid to the beneficiary?
I cannot think that this would make a difference but I would welcome views from readers on this point as well.
Query 19,739– Trustworthy.
National insurance
Requirement to notify HMRC of National Insurance liability.
A friend’s daughter has asked me for some advice. She left the UK in February 2021 to marry a US citizen, entering the USA on a fiancée’s visa. She intends to live there for at least two years before making any substantial visits to the UK.
In 2019 she started working as a freelance audio editor and also as a nanny. She says that she earned about £5,000 and £2,000 from these activities in 2019-20 and £7,500 and £3,000 in 2020-21 before leaving the UK.
She has not notified HMRC of her activities. She will clearly have no UK income tax liability in either year, but she is above the class 2 NIC small earnings level in 2020-21. What should she now do to make this right?
Will she be required to complete a full tax return for 2020-21, when the class 2 liability is fixed as a weekly amount? And would the two completely separate activities be added together in calculating National Insurance liabilities (rendering her liable to class 2 in 2019-20 and class 4 in 2020-21)?
Readers’ views would be very welcome.
Query 19,740– Chuck.
Australian income
Tax on Australian company’s dividends to non-dom.
We are talking to a new client who was born in Australia, although we believe that her father would have been UK domiciled as at the date of her birth.
She is intending to come to the UK for five years and we have been asked to comment on her UK tax position. We have taken the approach that she will not benefit from the non-dom rules so we are looking at the impact on her worldwide income.
She will be receiving loans from an Australian company and we have been advised by our Australian counterpart that those loans are taxed under Div 7A in Australia, which means that the company votes a dividend to cover a proportion of the outstanding loan which then reduces the loan balance. This dividend is taxed as income in Australia.
Having done a little reading around Div 7A it seems that the system is clearing down the loans by way of dividends, and there doesnot seem to be anything more complicated about the structure, but I wonder if I am missing something along the way?
I hope readers can provide some assistance.
Query 19,741– Adviser.
Site fees
Is caravan park owner secretly charging 5% VAT on site fees?
My husband and I own a caravan on a holiday park in Wales and we pay an annual pitch fee of £3,000 plus VAT, ie £3,600.
We always receive an annual rent demand from the site owner at the beginning of January and pay it in the same month.
After the temporary VAT rate reduction from 20% to 5% for the hospitality industry last year, I asked the site owner if he planned to issue a VAT credit to apportion the VAT charge between 20% up to 14 July and 5% thereafter. He said ‘no’ because it would involve too much time and cost and I understand that he was within his rights to do this.
However, we expected that our 2021 charge would be wholly subject to 5% VAT. In ‘Summer treats’ (Taxation, 23 July 2020, page 12), Neil Warren included a quote from an HMRC spokesperson that normal tax point rules would apply with the rate reduction so that an annual payment made in January 2021 would wholly qualify for 5% VAT, even though the rate cut will end on 31 March.
The park owner has issued the 2021 demand with the wording ‘£3,600 including VAT’ – and does not specify the rate of VAT. This seems to me as though he is pocketing the 15% VAT difference himself. He has refused to confirm the rate of VAT he is charging and has refused my request for a VAT invoice because he said that his business trades as a retailer.
What do readers think about my view that I should get a £450 VAT refund for my 2021 fee?
Query 19,742– Val.
