New queries: 3 October 2019

Stateside 

Tax treatment of US dividend on UK tax return.

A UK resident and domiciled client received a substantial special dividend from a major corporation in the US. This was paid just before its merger with another corporation in July 2018. The Internal Revenue Service (IRS) gave approval that the payment should be split between a capital element and an income element.

Would it be correct to follow this treatment when my client declares the payment on his 2018-19 tax return? Or should the entire sum be treated as liable to income tax?

Readers’ thoughts are appreciated.

Query 19,443– Recipient.

Equitable release 

Tax on transferring property into a trust.

My client wishes to help his brother who is in financial difficulties. His brother owns a house jointly with his wife with a current market value of £300,000. This house has always been their main residence. They have taken out an equity release product which has a balance of £80,000. They have no other assets or liabilities. 

My client is prepared to pay off the £80,000 debt but wants to ensure that his brother cannot enter into a similar transaction in future. 

He is proposing that the property is transferred for nil consideration into a trust whose beneficiaries would be his brother’s three adult children (one of whom also lives in the property) in equal shares. The plan is that the trust rents the property to the brother and his wife for the rest of their lives at £1 a year and the three children would inherit it on the death of the brother and his wife. 

The trust deed would also permit the sale of the property and the use of the sale proceeds to buy another property on the same terms if the brother and his wife wish to move. 

• Would there be any stamp duty land tax liabilities on the above transactions? 
• Are there any other tax implications? 

I look forward to advice from readers.

Query 19,444 – Brotherly.

Time to act 

How to preserve lettings relief with forthcoming changes.

I read Gavin Fernandes’ recent article ‘2020 vision’, Taxation, 1 August 2019 (tinyurl.com/yy4s3l7p) on the changes to private residence relief with great interest as I have a couple of clients who stand to lose valuable relief if they make a disposal on or after 6 April next year. 

I’ve discussed with both of them whether they can bring the date of disposal forward into this tax year but they are not in a position to do this. 

They have asked me whether there is anything which they can do to lock in the relief now even if they don’t sell until next year. I recall that when retirement relief was being withdrawn it was relatively easy to drop shares into a trust to preserve the relief without triggering a tax charge. 

It seems to me that such a simple solution would not work now. A transfer into almost any sort of trust would be a chargeable lifetime transfer and if the properties were sold for market value to a trust there would be a stamp duty land tax charge. 

Has anybody found a way to preserve lettings relief in these circumstances, either through the use of a trust or by way of another route?

It also occurs to me that, even if a route was found, it might contravene the Professional conduct in relation to taxation (PCRT) guidance. 

Would a professional body take the view that by locking in the relief so that it was not lost, even though there was no third-party disposal until after 5 April next year, I would be going against the clear intention of parliament by recommending such a course of action to my clients? 

What do Taxation readers think?

Query 19,445– Procrastinator.

Hijacked 

VAT outstanding on lease termination payment.

One of my private clients, who is registered for VAT as a computer consultant, was recently involved in an unfortunate incident, where his business car was hijacked by two men while he was waiting in the vehicle at traffic lights. The end result was that the car was found two days later in a field, burned out and a complete write off. 

The car in question was on lease hire and the leasing company has advised that a final leasing payment of £19,050 will need to be made by my client. I understand the phrase is a ‘termination payment’. The leasing company has said that this payment includes 20% VAT, but is this correct? After all, my client is not buying the car – surely it is a compensation payment to the leasing business? 

Secondly, if VAT is due, will my client be restricted to a 50% input tax claim on the payment, as applies on car leasing payments where there is some private use of a vehicle? He claimed 50% VAT on the payments before the write-off. Although my client will make a claim to his insurance company for the net cost (less a £500 excess), it is still important to get the VAT right. 

Can Taxation readers help, please?