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Inheritance tax idea
Using loans to reduce inheritance tax liability.
A large inheritance tax bill is likely when my client dies and he has suggested that he reduces the net value of his estate by taking out a loan to create a debt.
With an equity release scheme, or a lifetime mortgage, the client could borrow from a commercial lender with the debt secured by a charge against his properties. The interest would be rolled up so that the loan would only be repayable after death. The client could then gift the cash from the loan to his children. As a potentially exempt transfer there would be no inheritance tax liability if he lived for seven years.
However, the interest bill after death could be considerable. The children could invest the cash and try to obtain an interest rate which was reasonably close to that payable on the loan. The problem is that the interest would be taxable in the children’s hands.
My client has suggested using a bridging loan firm to lend him, say £1m, which he would give to the children. They would ‘invest’ the £1m back by loaning it to the same firm. If everything were prepared in advance all three transfers (bank to father, father to children, children to bank) could be done in one day. Under this arrangement, we can have an agreement from the outset that the lender will only charge the father 0.5% interest a year, and the children will make an interest free loan to the lender.
Would this work from an inheritance tax perspective? Clearly the debt would have to be chargeable on the estate, and paid back after death. The fact that the children give £1m to the executors after death to repay the loan on the estate should not be a problem, as can be seen from the example on IHTM28028.
Can readers think of any tax rules that would prevent such a strategy from working?
Query 19,747– Middleman.
Long service award
Income tax exemption on retirement gift.
While reviewing our client’s latest records we spotted that they have given a gift on retirement to a long-standing employee.
If the employment has lasted more than 20 years, are we able to claim exemption from income tax charges for the employee as a long service award even though the gift is on retirement? The value of the gift is small, so would be easily covered by the £50 a year of service limit.
My client company took over the business five years ago, so I am assuming that the employment with the previous owner of the business will count towards long service under TUPE arrangements. Is that correct?
I look forward to hearing from readers.
Query 19,748– Retiree.
Share capital
Distributing share capital back to shareholders.
A trading company client has issued share capital of £200,000.
This share capital was originally subscribed for in cash, on a ‘£1 for £1’ basis, and as the company has more working capital than it needs, the plan is to return £150,000 to its shareholders by way of a capital reduction, through which 150,000 £1 ordinary shares would be cancelled and £150,000 cash returned to them.
The company has distributable reserves in excess of £150,000, and we have been advised that the transactions in securities rules would operate to treat the £150,000 which is its proposed would be paid back to the shareholders in return for cancelling their shares, as an income distribution rather than as a return of capital.
Surely this cannot be correct, as the company is simply returning the £1 a share that the shareholders have originally subscribed for their shares, with no uplift.
Alternatively, if the company went down the ‘company purchase of the shares’ route instead of a capital reduction, buying back the shares back for their £1 a share subscription price, again with no uplift, we would not have thought that HMRC could treat that as income? As far as we are aware, it is only the premium above the nominal value that has an exposure to be treated as income.
We would prefer to use the capital reduction rather than a ‘company purchase of own shares’, but could the tax treatment be so different?
Readers’ thoughts would be appreciated.
Query 19,749– Confused.
Vintage car
VAT issues on importing classic car.
I have a client who is looking to do a business deal with someone he knows in Australia but I am confused about the VAT position.
My client and the other person will purchase a classic car jointly as a partnership – it is 45 years old and is currently owned by an Australian collector.
The car is situated in Sydney. The purchase price will be a bargain figure of about £750,000, with an estimated selling price of £1m. They intend to split the profits equally.
The sale is most likely to be to a dealer or collector in America or the UK. My client’s partner has said that if they sell to America, they will ‘get the VAT back’. I am not sure what he means and he may even be referring to customs duties.
Could readers share their thoughts on the UK VAT and duty issues, looking at a potential sale in both America and the UK.
Will having left the EU make any difference if a UK buyer is found? My client lives in London.
I look forward to receiving readers’ replies.
Query 19,750– Jaguar.
