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Can preference shares be considered ordinary shares?
My query concerns whether what are described as preference shares, can be regarded as ordinary shares, for the purposes of ITA 2007, s 131, specifically the ability to use the capital loss realised on the shares against other income.
A client held ordinary and preference shares in an unquoted trading company and following a refinancing, both categories of shares have been realised at a loss of about 25% and although it is quite clear the loss on the ordinary shares qualifies for relief under s 131, it is not clear to me whether the loss realised on the preference shares does.
ITA 2007, s 989 is clearly critical here: ‘Ordinary share capital … means all the company’s issued share capital … other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits.’ I am also aware of the very relevant FTT case of Bielckus (TC5044), however I am wrestling with how the relatively straightforward terms of my client’s preference shares sit with s 989.
In short, the preference shares provide for a cumulative fixed rate dividend of 9% a year, payable at the time the shares are disposed of, and if that was all, I would be quite content that they do not fit into s 989. However the preference shares also provide that if my client were to leave the issuing company’s employment prior to an onward sale, he will be paid a reduced cumulative dividend of 2% a year for the duration that he holds the preference shares.
The apparent annual ‘fixed rate’ can, therefore, vary, depending on the circumstances of the vendor (employed or not employed) at the time of disposal.
Is this potentially variable rate sufficient for the preference shares to be regarded as ordinary shares for the purposes of s 989?
Query 20,243 – Perplexed.
Method to claim foreign tax credit relief.
Our client, a UK resident individual, is due to receive equal annual payments over three years following his retirement from an Italian managed and controlled international partnership.
The payment comprises an amount representing the disposal of goodwill and an amount for work in progress.
These payments will be taxed as income in Italy in the years of receipt. The UK tax liabilities – CGT and income tax – will arise in the year of retirement. This gives rise to a mismatch for double tax relief in that the payment of foreign tax is spread over three years. Can readers advise how best to make the claim for foreign tax credit relief?
Query 20,244 – Double Trouble.
Tax treatment of income from willow timber and solar panels.
I act for a client who runs a small consultancy company. His grandmother died last year and left a farmhouse and some land equally to my client and his eight cousins. The farmhouse and most of the land was subsequently sold and each cousin received about £200,000.
Approximately 50 acres of land remain and, at present, the land is sparsely populated with willow trees planted by the late grandmother. The cousins intend to plant some 30,000 new willow trees and have negotiated a contract to sell the grown timber for cricket bat willow. This will generate around £100,000 every five years.
Additionally, a solar company wishes to use part of the land for solar panels.
The client has suggested possibly transferring the land to a limited company owned equally by the nine cousins or alternatively, to form a partnership. Apart from initially planting the new trees, it seems that little activity takes place until the trees are grown and the timber sold. As such, I am not sure as to whether this represents a trading or investment activity.
I understand that profit from the sale of woodland is exempt from income tax and corporation tax. As such, do the cousins need to do anything? If they retain ownership of the land in joint names, presumably the proceeds from the sale of timber would be tax free with a liability arising only in respect of any rental income derived from letting part of the land for solar panels. Any advice would be greatly appreciated.
Query 20,245 – Cricket Bat.
VAT on contribution to costs?
One of my farmer clients is hoping to sell some land with planning permission for housing to a national developer. He has agreed a contract with a land promoter that means the promoter will get 15% of the future sale for both obtaining planning permission and negotiating a contract with a developer. My client will receive an annual fee of £5,000 from the promoter to help with costs he incurs and also to compensate him for the inconvenience caused by the fact that the promoters will need access to his land. Is this fee subject to VAT? My client has not opted to tax the land at the moment.
To his shock, my client has learned that he will incur initial legal and professional fees of £10,000 plus VAT from third party businesses – including my own firm and a ground testing business – to ‘get the ball rolling’ with the project. However, the land promoter has reluctantly agreed to pay him the full £10,000 to cover these costs as a goodwill gesture so that my client is not out of pocket (he will claim the ‘plus VAT’ as input tax). My question is as follows: must my client charge VAT to the land promoter, ie asking them to pay him £10,000 plus VAT as their contribution?
Readers’ thoughts would be appreciated.
Query 20,246 – Giles.
Queries and replies
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