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Trust tax
How are capital additions included in a ten-year charge?
A settlement was created 20 years ago with a capital sum of about £150,000. The settlor had no other trusts so this was a nil-rate band trust. Matters were fairly straightforward for the first ten years. There were some capital additions, but the total value after ten years was still below the nil-rate band.
We are now at the second ten-year anniversary and in the past decade there has been another single capital addition of about £150,000. There have also been some smaller additions as well as annual trust expenses of about £5,000, which the settlor pays from his own pocket.
The net result is that the total value of the settlement is now about £400,000.
How will the above affect completion of the second ten-year return and, more importantly, the calculation of the ten-year inheritance tax charge. Also, how should the additions to the trust be taken into account. Finally, can payment of the annual trust expenses be regarded as habitual gifts out of income?
I look forward to replies.
Query 19,571 – Trustee.
Flying away
Must a capital gains tax return be made if a loss arises?
My client is in the Royal Air Force and has lived in RAF accommodation for about 15 years. He bought a couple of buy-to-let apartments as investments. The first flat was sold at a substantial loss and completion was on 15 April 2020. I imagine that the exchange of contracts could have been before 6 April. My first question is whether he needs to file the new capital gains return and for future reference, is it necessary to file such a return if there is a loss?
My client is now planning to buy a house as a home for himself and his fiancé for about £450,000 and he will sell the second flat for about £250,000. Since he is buying a second property – he expects the house purchase to take place before the sale of the flat – I assume he will have to pay the higher rate of stamp duty. I believe that the excess charge can be reclaimed if the other property is sold within three years of buying the new one.
Can Taxation readers advise on the mechanism for doing this? And are there any special rules applicable here for armed forces personnel given that they are frequently moved around the world without any say in the matter?
Query 19,572 – Biggles.
Trust tangles
The motive defence against an apportioned capital gain.
John was born abroad, is UK resident and non-UK domiciled but is deemed domiciled from 6 April 2017. In 1990, he set up an offshore trust which subscribed for the shares in an offshore company. This acquired a UK residential property for £400,000. As principal beneficiary he occupied the property for a few weeks each year and more recently let it. Returns for the annual tax on enveloped dwellings and non-resident income tax have been filed. The property was valued at £1.2m in 2010 and this value is thought to have applied in 2008 and 2015. No capital payment payments have yet been made by the trustees.
The directors have been offered £1.5m for the property. The company will then be liquidated and the net proceeds distributed to the settlor. Could readers comment on my analysis?
- The company’s gain (TCGA 1992, s 2B(4)) would be calculated using the 5 April 2015 value or time apportionment. To the extent that it is exempt by re-basing, the corporate gain could be apportioned on the settlor (TCGA 1992, s 3) unless the motive defence applies if there was a non-tax reason for the trust.
- The trustees would not be liable under TCGA 1992, s 1A on an indirect gain from the company liquidation because the shares would not then derive 75% of their value from UK land.
- The settlor has paid some trust and company expenses which are treated as further loans by him, but no interest was charged. He does not meet condition A in ITA 2007, s 835BA, so would TCGA 1992, Sch 5 para 5A enable him to avoid TCGA 1992, s 86 if he now charges interest? Could an election under FA 2008, Sch 7 para 126 then be made if a s 87 capital payment is made to him?
- If s 86 applies, will the settlor’s gain be by reference to the original cost plus any improvement expenditure?
- If s 86 was in point, the settlement is probably a qualifying one following the FA 2008 changes.
- Credit for capital gains tax paid by the settlor on a s 3 assessment should be given against any s 86 liability, but perhaps not if under s 87.
Readers’ comments are welcomed.
Query 19,573 – Adviser.
Coronavirus VAT challenge
VAT on charges for courses arranged in India.
We act on behalf of a client who has previously run short courses in India with attendees. She has never accounted for UK VAT on the course fees, which I presume is correct?
Currently, she is stuck in India because of the coronavirus crisis so is doing online training and coaching from India and no live events.
She trades as a limited company registered in the UK, and my query is the VAT position on the charges she makes for these online courses.
Most delegates are business-to-consumer (B2C) but there might be some business-to-business (B2B) corporate customers as well that will either be based in India or the UK.
As I understand it, the courses are not digital because she has some interaction with the clients, but if they were digital, does this change the VAT liability?
Readers’ help would be appreciated.
Query 19,574 – Tendulkar.
