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Inheritance income
Taxation on income derived from inheritance.
My client’s mother died in June 2019, leaving a portfolio of open-ended investment companies (OEICs), among other assets, to him and his two sisters.
A decision was taken to assign the shares to the beneficiaries in satisfaction of his entitlement, so that they would be assessable on gains made on sale and would benefit from three annual exemptions. However, the disposal was delayed until recently because of the coronavirus pandemic.
I am happy that a third of the gains over probate value will go on each beneficiary’s 2020-21 tax return, but I am wondering what to do with any income. Should a third of accumulations and distributions reported by the funds from June 2019 to April 2020 be shown as income on each beneficiary’s 2019-20 tax return? Further entries would then be made on the 2020-21 returns from 6 April to the date of sale?
I look forward to hearing from Taxation readers.
Query 19,607 – Incoming.
Food for thought
Input tax on expenses of self-employed pub manager.
One of my clients owns two pubs in different parts of the country. As a result of the Covid-19 crisis, he made both pub managers redundant and, following the reopening in July, both venues are being run by self-employed managers in the short term.
My client has agreed to pay the food and overnight accommodation costs for one of the managers because the pub is 150 miles from where he lives.
My concern is VAT: is input tax blocked on the food and hotel bills because the manager is not an employee of the business? It would not be VAT efficient for the hotel and restaurants to invoice the manager, and the manager recharges my client on his sales invoice, because the manager is not VAT registered so would be recharging the VAT inclusive value of the expenses.
Readers’ thoughts and advice would be appreciated.
Query 19,608 – Queen Vic.
Hush money
The tax consequences of non-disclosure money.
I have just completed the quarterly management accounts for a limited company, which made a big loss due to the coronavirus pandemic. The business was supported by a substantial capital introduction from the sole director and shareholder. From previous experience, I knew that he was short of money so asked where these funds had come from. My client was honest and said that he had been romantically involved with a high-profile married celebrity. The affair had ended and she was paying him a large amount of money in monthly instalments over the next two years and he had agreed not to reveal publicly any details of the affair either on social media or to any local or national press. I understand that there are no contracts involved.
My concern is tax and VAT. The receipts will exceed the VAT registration threshold after the ninth month and I wonder whether there is a risk that HMRC would see that a taxable service is being supplied in return for this money and he should therefore account for output tax. That said, the money is really for ‘not doing’ something rather than providing a service. Even if it is a service, is it really business income? Also, should the receipts be included on his self-assessment tax return?
I would appreciate Taxation readers’ thoughts on this.
Query 19,609 – Romeo.
Main residence development
Mitigating the tax on a main residence development.
My husband and wife clients have been resident in their jointly owned private property for more than 25 years. Recently, they obtained outline planning permission to build four private dwellings on their land. This will involve the demolition of their home which is located in grounds of less than one acre.
A development company has offered my clients about £1.5m, although this has not yet been accepted. The initial plan would be that the clients will vacate their house when the sale is completed. They would not be involved in the development of the new houses and their interest in the property and any connection with it will cease at the point of sale.
The question of capital gains tax has to be considered and because the sum involved is much larger than usual for me, I am wondering whether the only or main residence exemption will apply to the full amount. My concern is that HMRC might argue that the enhanced value relating to the planning permission is not eligible for relief resulting in an unexpected and unwelcome liability. Is that likely and, if so, is there any way to mitigate this?
I assume that if the sale takes place it will be subject to the new rules under FA 2019, Sch 2 (‘Returns for disposals of UK land etc’).
Finally, I also started to wonder whether I should suggest to the clients that they might consider coming to an agreement with a builder to develop the property so that they could share in any further profits when the four properties are sold. Given the uncertain nature of life at present and the question mark over future house prices due to the pandemic, they may be unwilling to accept this risk, but can Taxation readers give any brief comments on the various tax considerations that would need to be taken into account?
I would welcome readers’ comments – particularly to clarify the clients’ entitlement to main residence relief. Given the planning permission and demolition plans I want to be sure that I have not overlooked a critical aspect.
I would be grateful for advice.
Query 19,610 – Hopeful.
