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Dependent relative relief; Timely disposals; Share cycle; VAT on retirement
Dependent relative relief
CGT relief on property used by a dependent relative.
Before 5 April 1988, a father bought a house as his only and main residence. In 2011, he transferred a 50% interest to his children.
In 2015, the father died and he left his remaining half share in the property to the three children.
The property was sold in 2019.
Two of the children lived in the house with their father and they continued living there until the property was sold. However, one child never lived in the property after the original transfer of the 50% share to her and her two siblings. Will she receive capital gains tax dependent relative relief on her share of the gain?
I hope Taxation readers can advise.
Query 19,519 – Dutiful.
Timely disposals
Entrepreneurs’ relief on a disposal over time.
I was a sole practitioner until 1998 when I introduced two partners into the practice and arranged with them to acquire it over a period, the length of this being dictated by commercial expediency. The assets of the practice comprised premises, goodwill and work in progress with debtors.
The sale and transfer of 99% of the goodwill (at a nominal sum) and the work in progress started at that time and has continued until now, when I have a 15% interest in the working capital and 1% in the goodwill. Simultaneously, I have reduced my involvement in terms of time, participation, and profit share.
My partners did not want to acquire my 98% of the premises and in 2017 we sold the property, on a lease back, to my pension fund. I made a paper gain and claimed entrepreneurs’ relief.
HMRC made an enquiry under TMA 1970, s 9A. After disagreement, I asked for a review, which admitted my contention that the premises were a business asset, but introduced a new reason for refusal, namely that, to claim entrepreneurs’ relief ‘you cannot dispose of a business in stages’ and ‘you must have disposed of part of the business at the same time you disposed of your interest in the partnership.’
I am not satisfied with this and my preference is to appeal. I appreciate the point about ‘stages’ but there have been no rests, intervals or completions of any aspect, and the reduction of my interest continues. I am unable to find any guidance on restrictions of the length of time a disposal may take.
Alternatively, the year of disposal of the premises shows that my share of the net assets reduced from 33% to 14% and my share of profits reduced from 28% to 20%, which I would contend is a part disposal of my entire interest in the partnership’s assets and business.
Comments on the chances of a successful appeal would be welcomed.
Query 19,520 – Retiree.
Share cycle
Will a company purchase of own shares recycle funds?
We act for a family run business in which the father, who currently holds a controlling stake, is seeking to exit the company with his son taking over control. A valuation of £1.2m in respect of the father’s shareholding has been agreed between all parties.
The parties are exploring a purchase of own shares by the company which has sufficient distributable reserves. We also consider the conditions for capital gains tax treatment to apply. That said, although the company has enough cash to pay the exiting shareholder, it will leave the business with insufficient working capital.
The exiting shareholder is willing to make a loan back to the company to support working capital. However, we consider that a loan to the company may cause the ongoing connection condition to fail meaning capital gains tax treatment would not apply.
Would the ongoing connection condition fail if the exiting shareholder (father) loaned the money to his son in a personal capacity? Ultimately, these funds would then be loaned to the company by the son. We cannot see that the father is considered an associate of the son under CTA 2020, s 1059 to s 1061, but it does not feel without risk. Do any Taxation readers have experience of this situation?
We are aware of the possibilities of a NewCo structure and our question is specific to the recycling of funds.
Query 19,521 – Environmentalist.
VAT on retirement
Input tax query on post deregistration expenses
A limited company client recently undertook a members’ voluntary liquidation process to benefit from entrepreneurs’ relief. The company traded as a management consultant until the director’s retirement.
The company deregistered from VAT on 30 June 2019 and the liquidator was appointed on 9 July 2019. My understanding is that VAT on the liquidator’s final fees could be claimed from HMRC on form VAT427, but the liquidator says this is not possible because the fees are not linked to the trading of the business.
My understanding is that VAT should never be a cost to my client because the company only had taxable income; in other words, it was not partially exempt.
I also act on behalf of a florist who deregistered from VAT on 30 November 2019 due to reduced turnover. Her final VAT return claimed input tax on an invoice dated 1 October 2019 for six months’ rent on her shop until 31 March 2020, which she paid before she deregistered.
Was she correct to claim this input tax in full on the basis that the invoice was dated and paid before her deregistration?
What do Taxation readers think?
Query 19,522 – The Terminator.
