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Clearance dilemma
Selling shares between jointly owned companies.
My client has approached me with a proposal under which he intends to sell 40% of the shares in a company he owns to another company he owns directly, in other words not a group company, for cash.
There seems to be no commercial reason for this other than to extract cash at favourable capital gains tax rates. I have warned him about transactions in securities and told him that he is unlikely to obtain a clearance. He has come back to me and said that as applying for a clearance is voluntary could he not just do the transaction anyhow and see whether it is challenged by HMRC? I am very uncomfortable about him doing this, but I would prefer to be able to provide him with a definitive reason for this.
Can readers point me in the direction of something specific, either from HMRC or professional bodies, which I can use to justify why I could not advise my client to act in this way.
Query 19,875 – Opaque.
Loan repayment
Loan repayment with a capital gain.
In July 1995, Mr A loaned £12,000 to friends to assist with their house purchase.
A formal legal charge was registered on the property in Mr A’s sole name stating that the advance represented 30% of the cost of purchase, namely £40,000 and the repayment sum should represent the same percentage of the property’s sale price.
Mr A died in February 2019 when the market value of the property was £180,000 and the legal charge was formally transferred to his widow Mrs A. In May 2020, the property was sold for £200,000 and Mrs A received £60,000, representing loan repayment £12,000 and gain £48,000. Please may we have readers’ thoughts regarding:
- inheritance tax and probate value of the legal charge for Mr A in February 2019;
- capital gains tax treatment for Mrs A including the nature of the asset, the base cost in her hands, the applicable rate of capital gains tax and how to report the gain; and
- any other relevant points.
I look forward to hearing from Taxation readers.
Query 19,876 – Ranger.
Transfer of a going concern
Will TOGC property opportunity save VAT?
I act for a client who trades as a partly exempt business in the education sector. In other words, her business cannot claim all of the input tax incurred on its expenses.
My client is looking to buy the freehold of new premises from which to trade, and there are two properties available in the same block – both consist of three floors of office space and both have an option to tax election in place for the seller.
The first building is for sale at £800,000 plus VAT and will be a vacant building if my client buys it. The other building is for sale at £825,000 but has a long-term tenant occupying the ground floor paying rent of £25,000 plus VAT each year. For this property, the estate agent is saying that no VAT will be charged because the sale should qualify as a transfer of a going concern (TOGC) because the tenant’s lease has another three years left. This seems strange, but an excellent deal for my client because her input tax recovery is only 25% under partial exemption and she will earn rental income as well.
There is an old saying in tax that if something sounds too good to be true, it usually is. So, could readers explain what is happening here, please? Are there any pitfalls for my client to be aware of before agreeing a deal to buy the VAT-free building for £825,000? Are there any anti-avoidance issues to consider because my client is partly exempt?
Query 19,877 – Property Pam.
Professional indemnity insurance
Include an estimate for insurance in final accounts?
My client is a consulting engineer who operates through a personal service company – the IR35 rules are not an issue. The company ceased trading in 2021 and terminal loss relief is available. The client wishes to offset the trading loss of the final 12 months against profits of the preceding 36 months.
The company’s contracts with its customers require that it will maintain adequate professional indemnity (PI) insurance cover for six years. Unfortunately, the company has been unable to obtain a quote for a single premium multiple year run-off (or ‘tail-off’) policy due to the current state of the PI market. Instead, it seems that he or the company will have to continue paying annual PI premiums for the next six years.
Can my client include in the trading loss of the final 12 months an accrual for the estimated insurance cover for the six years following cessation of trade? The best estimate would be six times the final year’s premium.
I look forward to readers’ thoughts.
Query 19,878 – Peter.
