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Insurance bond
Managing the taxation of a discretionary trust.
A couple, both now deceased, set up a trust using a standard discretionary trust deed from the company with which they had invested some money in an onshore insurance bond.
The bond was one that terminated on the death of the second to die which occurred this year. The husband had died four years before.
My interpretation of the tax position is that one half of the chargeable event gain will be taxed on the wife (as settlor of her trust) and the other in the hands of the trustees (of the husband’s trust). This will give the husband’s trust a fairly large tax liability and, after crediting the notional basic rate tax, the larger part of this tax liability goes into the ‘tax pool’.
However, given that the proceeds of the chargeable event gain are the sole asset of the trust and are capital in nature, it seems that one cannot distribute any of this money as income so as to use the tax pool efficiently.
I would like to know whether Taxation readers know of any alternative to this gloomy analysis which I suspect is not uncommon.
Query 19,603 – Trustee.
Wavering waiver
Dividend waiver on a company distribution.
My husband and wife clients are 60:40 shareholders in a limited company in which he always earned the fees. The arrangement seems to fit within the principles of the case of Jones v Garnett [2007] STC 1536, known colloquially as ‘Arctic Systems’, so I am confident that her dividends have not been assessable on him.
This year the husband has inherited some money and would prefer not to pay higher rate tax on dividends from the retained profits in the company, so I am considering a dividend waiver.
As I understand it, this waiver should be in writing, and this should be effective as long as the company has the distributable profits to pay the full amount if it was not waived.
But the following question has now occurred to me: suppose the company has distributable reserves of £50,000 and declares it all as a dividend, paying £20,000 to W; the company then still has £30,000 in distributable reserves, which appear to belong 60% to him and 40% to her. The husband does not want to give his shares outright to his wife while the business continues, but can he make a further distribution of that £30,000 and waive his entitlement again?
Are there any other points to be taken into account?
I look forward to any assistance from Taxation readers.
Query 19,604 – Chiller.
Inheritance involvement
Would property occupation affect the value?
A close friend of mine died recently. She was an elderly lady who had lived in her house for many years, her husband having died about 20 years ago. Originally she was able to take care of herself, but with advancing years and increasing frailty about 15 years ago her daughter and her husband came to live with her to look after her and the house. I am not sure of the exact arrangements, but they have spent money on the property including adding an extension as well as installing new double glazing, making other improvements and carrying out work themselves.
As I understand matters, the house has been left to the daughter and the estate is being dealt with. I understand that some estate agents have valued the house and it seems there is potentially an inheritance tax liability. The daughter mentioned this to me and I believe she is seeking some informal advice. One thought that occurred to me is whether the estate agents would have taken into account the fact that she and her husband were living in the property. Should they have done this and would the fact of their occupation and that they have spent money on the house mean that the value of the property should have been reduced to take account of this? If so, is there a standard percentage reduction? Given the close family relationship, I am not aware that there was any formal arrangement such as a lease in place to give a formal legal right to occupy.
Also, would the late husband’s inheritance tax allowances be available now and might there be any other factors that could be taken into account?
I have not been asked to act formally, but just wanted to provide some general information so that they could take this up with their solicitor. Is this acceptable or should I consider asking the daughter to sign an engagement letter?
Query 19,605 – Friend.
Split use
Input tax and private use of new van.
My client runs a successful office partitioning business but he expects sales to decrease because of the Covid-19 crisis and the move towards more home working by businesses.
He has always operated both a car and van through his business but has decided to sell both vehicles and buy a new van for £15,000 plus VAT.
He will use the van for some private trips but his plan is to do more biking and walking because he lives in a city centre, so has little need for a car.
I have always taken the view that input tax can be fully claimed on the purchase of a commercial vehicle used by a business but I wonder whether the fact that it is partly replacing a car means that input tax should be apportioned in this instance.
If this happens to be the case, how much input VAT should be disallowed?
Taxation readers’ thoughts would be much appreciated.
Query 19,606 – Van Stan.
