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Mitigating tax on death.
My friend’s father (F) passed away 18 months ago leaving his widow (M) who is in good health, and three adult children. There is a company which traded in various kinds of vehicles since the early 50s. A/B shares were held 75% by F and 25% by M. F has left everything to M.
Until 2015 the trade was the principal activity and source of income, and it took place from several freehold premises. Recently, trading turnover decreased and finished about seven years ago but the company received rents from letting the trading premises and bank interest. In April 2023 my friend decided to restart the trade. Some of the premises have been sold but three workshops are retained and were let until a year ago when the son took them back for the resurrected business.
There is also one large property which used to be partly used in the business with rented flats above. It is now for sale and will give net proceeds of about £3m. There is now minimal property investment income. The company has cash of £2m. The trading is opportunistic and carries stock of about £300,000 (this is likely to increase significantly and could hit peaks of over £3m). The son will need to retain the cash reserves to maximise the buying opportunities. The company net assets are about £5m.
M would like to gift her shares to her children but there would be no BPR and CGT would arise on her 25% along with IHT exposure if the transfers were made now and she failed to live seven years.
Could my friend reduce the exposure if the company continues its trading activity for at least two years from April 2023 to establish BPR and retains evidence of the need to have available the large cash resources to justify this? The intention would then be to either retain the shares in M’s name for the siblings and continue trading when they would pass on her death with BPR and CGT uplift, or alternatively to transfer the shares to the family after April 2025 (two years from restarting the trade) with elections to hold over. In both cases would the company have to continue to trade post death or transfer for a further two years for the siblings to avoid IHT and CGT? The son would then like to retire and dissolve the company.
I’d welcome suggestions on how to mitigate tax on M’s death and the winding up of the company. A friend at the pub said that the two-year BPR rule starts from two years after re-starting the trade (four years to qualify for BPR on M’s share transfer in either case). Are they right?
Query 20,307 – The Phoenix.
From frying pan into the fire?
My client has run a consultancy business via his own limited company. Turnover has been in excess of £100,000 each year and the company had built up cash reserves as not all of the profits have been extracted by way of dividend. The client now wants to gradually wind down his consulting activity and use the cash in the company to fund the acquisition of properties which will be let out for short terms as holiday accommodation or via Airbnb. The balance of acquisition costs being raised via bank borrowings.
This seems a tax efficient way of proceeding as it avoids his having to pay tax on funds extracted to purchase the properties in his own name. I’ve warned the client about the long-term issues of extracting funds from the company if, and when, the properties are sold. However, I am concerned about VAT – the company is still VAT-registered and therefore this will mean that VAT has to be charged on the rents, at least until the combined rental and consultancy income falls below the threshold. If a subsidiary company is formed to purchase the properties and a group registration is not made would that solve the problem? Would that then cause company tax issues because the funds would have to be moved from the existing company into the new sub? Would I be solving one problem only to create another one?
Query 20,308 – Cautious.
Do separate payments prevent a VAT registration problem?
One of my clients is a minor celebrity. Following her appearance on a reality TV programme, she agreed a contract of £100,000 to promote a financial product on behalf of an investment company.
The investment company is apparently partially exempt for VAT purposes and has asked my client to raise monthly sales invoices of £25,000 rather than a single invoice for £100,000 because this will apparently avoid the need for my client to register for VAT and charge VAT on the fee. Is that correct?
A colleague thinks that the total contract value is the relevant issue and not how it is paid. My client’s only other source of self-employed income as a sole trader is a retainer fee of £500 per month for writing an online blog about clothes.
What do readers think?
Query 20,309 – Fashion Freda.
Should French-based chef charge VAT on services?
My client owns a restaurant in Manchester and uses the services of a French-based chef for one week each month to do special French cuisine nights. The chef is self-employed and lives in Paris but is VAT registered in the UK because he has a small retail shop selling food. The chef charges 20% UK VAT on his services and my client claims input tax but a colleague says this is wrong and that the chef should not charge VAT because my client should do the reverse charge instead. My colleague says that HMRC could disallow input tax for the last four years on the chef’s invoices because VAT has been incorrectly charged.
What do readers think?
Query 20,310 – Delia.
Queries and replies
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