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Micro company
Dealing with deficit on directors’ loan accounts.
My client is a small company owned 50-50 by husband and wife, who are also directors. Their son is a director but does not own any shares.
Just before the 2016 dividend tax changes the company declared dividends of £15,000 per shareholder. There were distributable reserves to pay the dividends which were declared on personal returns. Nothing was paid to shareholders and the amounts due were taken to directors’ loan accounts. The intention was for the company to repay the directors’ loan accounts and not declare further dividends until it had paid the sums owed to the directors.
Trade has now slowed and only £6,000 been repaid, leaving a balance of £24,000. The profit for 2020 was small and reserves are negligible.
The couple want to retire and hand over the business to their son. They do not need the loan account repaid. If the loan is released, I believe this will be a taxable credit and there are no losses to cover this. Capital loss relief would not be available to the shareholders, since it was not a loan made for trading purposes and is probably already irrecoverable. Inheritance tax is unlikely to be an issue as the loan has no value.
Could the corporation tax charge be avoided if the loan was converted into new ordinary shares issued to existing shareholders? The loan released would be debited to the directors’ loan accounts and credited to a new share premium account. They could then gift their shares to their son, which would be a disposal for CGT purposes for little value.
The son as sole shareholder continues in the business and the husband and wife will not be directors or receive any further salaries.
Are there problems with this proposal, or can readers suggest something better?
Query 19,743 – Cautious.
Capital income
UK taxation of ‘capital’ income in Finland
Undisclosed capital income from sales of wood has been received for many years from the part ownership of a piece of forest in Finland.
The personal Finnish calendar year tax return states the income is from:
Forest business-capital income from forest partnership x
Less forest business tax deduction 5% (x)
Taxable capital income x
We are advised that the partnership pays VAT in Finland and it appears the partnership makes payments on account of the personal tax of the partners in Finland. The partners then personally receive a tax refund.
In case something is being overlooked, we would appreciate any views on how this ‘capital’ income should be treated and disclosed on the self-assessment tax return. What is the taxable figure? What is the 5% deduction? The Finnish personal tax rate is 30%.
Are there any tax reliefs available in the UK? Is there any benefit/the possibility of splitting the income from calendar year to tax years. How many years (with overlap) should we now declare?
Can readers help me in case I have missed or overlooked something? Someone I know has suggested that farmers’ averaging might be available.
Any advice or thoughts would be welcomed.
Query 19,744– Trickery in the Forest.
Property liability
Inheritance tax on life interest in uneconomic flat.
Our client became the life tenant of a flat from the will of her late husband who died in 2014.
The flat has proved difficult to let and any income received from the property is only incidental to her main sources of income.
I believe that the life interest will form part of her estate when she dies and I am unclear as to whether her estate is then liable for all the inheritance tax that may be due.
Her other assets would, at present, be enough on their own to trigger a charge to inheritance tax on her death. There is no inheritance tax allowance from her late husband’s estate.
Given the low level of income and her age, any inheritance tax charge to her estate would seem disproportionate compared with the benefit to her.
Would readers advise on the inheritance tax liability on her death and, if not, on my client’s executors who would be responsible for any inheritance tax.
I look forward to replies.
Query 19,745– Wooden Horse.
VAT to US customer
VAT on hiring out recording equipment to US customer.
One of my clients hires out television recording equipment and cameras, mainly to production and television companies based in the UK.
It has come to light that for the past three years, she has not charged VAT to an American production company for its UK filming work – and has also failed to charge VAT to an Irish company when it films in London, applying the general business-to-business rule for services.
I understand that the American fees should have charged UK VAT, meaning an output tax underpayment of £23,000 which we must now correct.
If my clients issued a VAT only invoice for £23,000 to the American company, with a current date, can the American company reclaim this VAT with a non-EU VAT claim to HMRC? Or would a claim be out of time for some of the fees which are two or three years old?
Finally, what are the VAT changes for my client since the end of the UK’s transitional deal with the EU on 31 December?
Readers’ thoughts would be appreciated.
Query 19,746– Cameraman Clive.
