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Tax position on indexation increase.
Wills containing a nil-rate band trust sometimes provide for the trustees to accept a loan note from the surviving spouse to be repaid increased by indexation.
I have been asked for my opinion on the taxation position on the increase.
I wonder if readers can give me some pointers on the below:
- Is the increase taxed as income taxable in the year the loan is repaid?
- What is the inheritance tax position on the trust?
- Are there any tax consequences if the trustees waive the right to receive this increase?
Taxation readers’ help would be appreciated.
Query 20,427 – Theythinkiknow.
Residence nil-rate band and nursing home fees.
My client has now retired but she was a successful businesswoman who has built up a comfortable level of wealth and has significant amounts of pension and investment income. She has never married and has no children. Her will leaves her estate (after a few charitable bequests) to her sister, who is married and has children of her own. She had already started making regular gifts to her sister out of surplus income to reduce her eventual inheritance tax liability.
Unfortunately, my client is now having health problems and will need to move into a nursing home. She can’t afford to pay the fees and keep making the same level of gifts to her sister. Rather than sell the house, she is thinking of renting it out. That would raise some funds but not enough to fund all of the nursing home fees. So she has suggested that she could borrow against the value of her house and pay the balance of the fees out of those funds. This would enable her to keep making gifts to her sister. On her death the house would be sold to repay any outstanding borrowings and the balance of her estate would pass to her sister. Because she has no direct descendants the resident nil-rate band, or the downsizing relief, would not be available. The leakage to her estate from the interest payments on the loan would be less than the IHT due if she simply sold the house and retained the proceeds in cash.
Is this a viable solution or would HMRC say that she was making the nursing home payments out of income and any money paid to her sister would be a payment of capital?
Query 20,428 – Worried.
Reclaiming VAT on costs incurred by charity.
I have been asked to help out a couple of local charities. Both are new charities and the people I’ve spoken to talk about reclaiming VAT on their costs but I know it’s not as straightforward as that.
Charity A is unlikely to make any ‘sales’ as such. It’s a charity set up to use heat seeking drones to find lost pets (mainly dogs). As far as I’m aware its only income will be grants and donations – if it manages to locate a missing dog, the owner won’t be charged for it but will be asked for a donation instead. All its income will therefore be exempt from VAT so they can’t then register for VAT and reclaim any VAT charged on their costs – can readers confirm this to be the case?
Charity B is a smaller version of the Ampthill festival and will sell tickets for a proms-like event and run a bar and make bar sales. In this scenario, any ticket sales and bar sales will be standard rated and they will be required to register for VAT only if their VATable turnover exceeds £90,000 a year. They will also receive grants and donations which will be exempt from VAT but all I hear is talk about reclaiming the VAT on their costs but no one appears to be thinking that if they register for VAT, they will need to charge VAT on these VATable supplies.
Can your readers confirm my understanding to be correct? Could they also give me some more detailed guidance on the VAT status of the various sources of income of typical charities?
I appreciate that if either does register for VAT we are likely to have the partial exemption rules to consider also.
Query 20,429 – Charity Guy.
Is setting up an employee benefit fund a good idea?
One of my clients is a large family business about to celebrate 50 years of continuous operation. The family shareholders want to mark the occasion by setting up a fund for the benefit of employees past, present and future. This money would be provided by the company and the fund would be administered by a committee of employees (shareholders would be excluded) and a couple of external professionals.
The idea would be that any employee could make an application on a confidential basis to the fund for support – whether it be by way of short-term loan, help with funding children’s musical or sporting activities or anything else which the committee felt was a good use of the money. The company is not seeking any tax advantage from the arrangement but is concerned that the use of employee benefit trusts as tax avoidance vehicles has soured the whole area and that there is a significant risk that these arrangements would create tax liabilities for employees.
Have Taxation readers any experience of setting up a ‘genuine’ employee benefit trust arrangement and is there a way to prevent unwanted tax charges?
Query 20,430 – Hopeful.
Queries and replies
Full T&Cs: tinyurl.com/RFguidelines.
