.png)
.png)
American house; Top slicing; Side saddle; Brainwave
American house
Treatment of US property gain for UK resident.
I have a client who has sold a residential house in the US and made a gain of US$500,000 and a sterling gain of £900,000 due to the exchange rates applicable at the time of acquisition and disposal.
Given that the US dollar gain converted at the date of disposal is about £400,000, I am wondering whether I can show the gain in two parts. This is because the residential component will be taxed at 28% whereas the currency gain should be taxed at 20%.
The client is UK resident and domiciled and the property was never an only or main residence. Any advice from Taxation readers about this would be welcome.
Query 19,507 – Transatlantic.
Top slicing
Calculation dispute on top-slicing relief.
Our client inherited an offshore life insurance policy which was surrendered in the tax year ended 5 April 2017 for £48,000. His only other income was employment earnings of £33,500 gross which were taxed under PAYE.
We submitted the tax return in good time and in 2018 were informed that our client had underpaid by £100. This was shown in the computation from HMRC to be due to a difference in our top slicing relief claim.
We appealed, and HMRC agreed that our computation was correct.
In January 2020, we received a further letter from HMRC stating that its earlier agreement was incorrect and our client does owe £100. The department’s error was apparently due to ‘ongoing issues with the self-assessment calculator following the introduction of the new nil savings rate’.
HMRC is citing its current interpretation of ITTI0IA 2005, s 535(5) and s 535(6) in its Insurance Policyholder Taxation Manual at IPTM3840.
Our software, and my reading of the Taxation article ‘It’s all gone Pete Tong’ by Tim Good (28 September 2017, page 14 and see tinyurl.com/soermo3), seems to allow the £500 personal savings allowance which HMRC is now denying.
I would appreciate readers’ views on the above.
Query 19,508 – Slice and Dice.
Side saddle
Extracting funds for property investment.
I act for a trading company (X Ltd) which has made a large profit in one year. This is unlikely to be repeated in future.
There are now surplus funds in X Ltd’s bank account of about £800,000. The two directors/shareholders, who both have other full-time employment, are keen to extract some of this money from the present trading company. This is because there is a potential future risk to the funds due to the nature of activities carried out by X Ltd. They would like to transfer the funds to another corporate vehicle for the purpose of residential property investment.
One possibility being considered is the formation of a holding company (Y Ltd) with a paper-for-paper swap to facilitate payment of dividends from X Ltd to Y Ltd. Those funds would then be ring-fenced from the risk in the trading subsidiary, with the holding company, Y Ltd, making the residential property investments.
An alternative suggestion is that a parallel company (Z Ltd) owned by the same two individuals should be formed.
Z Ltd would own a small, say 20%, holding of fully voting ‘A’ shares in the X Ltd. A ‘sideways’ dividend would be paid on the ‘A’ shares held by Z Ltd to strip-out the bulk of the funds from X Ltd. Z Ltd would then make the residential property investments.
Can readers comment on this latter suggestion as a tax-effective means of extracting funds and ring-fencing them for property investment in this way?
Query 19,509 – Windy Harbour.
Brainwave
VAT dilemma on opted property.
One of my clients made a big mistake in 2017, costing him £30,000 of VAT. Basically, the client purchased a commercial property in 2015 and claimed input tax on the purchase price because he registered for VAT and opted to tax the building.
He charged VAT on the rental income for two years until 2017 but then a new tenant took over the building, a small business that was not VAT registered.
My client had a brainwave and decided to deregister from VAT because the annual rental income was less than £83,000, therefore saving a VAT bill for the tenant who could not claim input tax. However, HMRC picked up on the fact that he did not account for output tax on his final VAT return on the market value of the property he still owned. The department assessed output tax of £30,000 based on a £150,000 valuation figure for the property.
My client is now selling the building for £300,000, which obviously exceeds the registration threshold, and his option to tax election is (I understand) still valid. Thus, my initial thought was that the client would have to re-register and charge VAT of £60,000 to the buyer. But then I thought again: if this is correct, does it not mean that HMRC has collected VAT twice on the same property deal: once when my client deregistered and again on the building sale?
Advice and thoughts from Taxation readers would be appreciated.
Query 19,510 – Double Jeopardy Man.
