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Business valuation
Net present value discounting applicability to business sale.
My client has just sold his business. He will receive £2m up front at completion on 30 June 2022 and then a further £500,000 on each of the next three anniversaries of the completion, being £3.5m in total.
I understand that the entire amount of £3.5m will need to be self-assessed in the tax year 2022-23. However, with inflation now at possibly 9%, can my client use net present value discounting to calculate the ‘real value’ of the future consideration which will be less than £3.5m?
I look forward to hearing from readers.
Query 19,935 – Inflated.
Overseas trusts
Inheritance tax and the ten year anniversary charge.
My client has two unrelated separate overseas trusts settled by unconnected non-UK domiciled individuals. One trust has a tenth anniversary and the other has a twentieth anniversary coming up.
Both have a similar setup, with overseas bank accounts, overseas assets and liabilities and ownership of overseas registered companies. In trust 1, company A contains no UK residential property but company B’s value is derived from a loan given to a beneficiary of the trust which was then used to purchase a UK residential property. In trust 2, company C also contains a UK residential property and some overseas assets and liabilities that do not fall under UK inheritance tax.
Does the change in inheritance tax rules in 2017 mean that company B in trust 1 falls under the ten-year anniversary rules as the company derives its value from a loan in connection with a UK residential property?
If company B does fall under UK inheritance tax, then how is the inheritance tax value for trust 1 calculated and reported to HMRC?
For company C in trust 2, how is the value attributable to UK inheritance tax worked out? Again, would we need to look at the value of property in isolation or do we factor in the other assets and liabilities contained within the company and the trust and use a pro rata method?
We would be grateful for any pointers from readers on this.
Query 19,936 – Maid Marian.
Employee benefit trust
Is tax deduction allowable on stolen EBT funds?
A client company that is still trading paid a £200,000 contribution to an employee benefit trust (EBT) which was loaned to a director via a subtrust. The director repaid the loan before 5 April 2019 to avoid the loan charge. It transpires that the trustee company now in liquidation misappropriated these funds and they are unlikely to be recovered.
Can the company claim a corporation tax deduction for this loss? My understanding is that employee thefts would be allowable, but not directors. In this case it is neither and it is not a loan relationship.
Had the funds not been stolen, the amounts would have been paid out over a number of years including PAYE/NIC and a tax deduction claimed at that point. It therefore seems harsh that the company cannot claim a tax deduction for its loss, which arose during its ordinary course of trading – the monies were earmarked to provide employee benefits – but I cannot see HMRC allowing a claim, or indeed how we could make a claim.
I would be interested in readers’ views.
Query 19,937 – Dog Tired.
Underwriting fee
VAT liability of underwriting service.
My client recently sold the freehold of a commercial property at an auction for £1.2m. There was no option to tax election on the building, so the proceeds were exempt from VAT.
However, before the property was sold, my client did a deal with a separate company: if the property failed to sell for at least £1m at the auction, the other company would buy it for this amount from my client instead. But if a selling price was achieved above this amount at the auction, the other company would get 50% of the extra proceeds, ie £100,000 in this case.
The problem is that the underwriting company has issued an invoice for £100,000 plus VAT for their commission. As it relates to an exempt property sale, the input tax is blocked under the rules of partial exemption for my client, so the true cost is £120,000. However, is there any scope for this fee to qualify as exempt under the land and property, financial services or insurance legislation?
My thinking is that the other company perhaps had an option to buy the property for £1m and then my client paid £100,000 in return for that option being given up. This could then perhaps be construed as a surrender payment linked to the land?
Readers’ thoughts would be appreciated.
Query 19,938 – Property Man.
