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Loan notes
Treatment of non-QCB loan notes in a discretionary trust.
My client settled some non-qualifying corporate bond (QCB) loan notes into a discretionary trust. At that point the accrued income was £100,000 and shortly afterwards the trustees received an interest payment of £110,000.
However, HMRC has applied the thin capitalisation rules to the interest on these loan notes so that approximately 75% has been disallowed for corporation tax purposes. This meant that on the trust’s tax return £82,500 could be put in as a distribution to be taxed at 38.1%. However, doing so would appear to lose £75,000 of accrued income relief (AIR).
My questions are as follows:
- Do the trustees have to declare the £82,500 as a distribution?
- If so, is the AIR lost?
- If the trustees can report the £82,500 as interest can they then claim the AIR of £75,000 to leave £7,500 taxed at 45%?
- For inheritance tax, what is the value transferred into trust assuming the loan notes were worth £1m? In other words, how does one treat the accrued income for inheritance tax purposes?
I look forward to hearing from Taxation readers.
Query 19,867 – Adviser.
Indian income
Indian and UK income of non-domiciled UK resident.
My client is a UK tax resident for the tax year 2020-21, but non-UK domiciled.
He has Indian income which consists of overseas employment income of £16,000 plus overseas interest income of £3,000. He also has UK employment income of £11,000 for the year.
The problem with the remittance basis is that it has an impact on his personal allowance. He would therefore like to use the arising basis but I am confused on how the foreign tax credit relief (FTCR) is dealt with in respect of his income under the double taxation agreement (DTA).
Both his overseas employment income and interest income has suffered tax in India (part at 10%, part at 20% and the rest at 30% based on domestic tax bands).
My questions for readers:
- In respect of the DTA between UK and India, is his salary income from India completely tax exempt in the UK? In other words, does India have exclusive taxing rights? Or should he claim FTCR, deduct it from his UK tax liability and pay the rest?
- His UK tax band is 20% and if DTA allows for 15% FTCR, does that mean he has to pay the remaining 5%? Or is the entire salary income in India only taxable in India and not liable to tax in the UK as per the DTA treaty between the two?
Any feedback from readers would be greatly appreciated.
Query 19,868 – Confused.
Will trust
Taxation of a beneficiary of a will trust.
Our client, Mr X, died many years ago. His wife, Mrs X, and a local solicitor were trustees and executors of the will.
The will left his limited company shares, which were wholly owned by him, to a will trust, which is discretionary in nature.
His daughter, who works for the company, is going to be lent a large sum of money from the company. Accordingly, a form P11D will be prepared.
The daughter is named as a potential beneficiary of the will trust.
I have two questions:
- Will tax under CTA 2010, s 455 be payable as a result?
- Would it be possible to exclude her as a beneficiary to avoid the s 455 tax?
I look forward to receiving replies from readers.
Query 19,869 – Uncertain.
Outsourcing
Does a US LLC outsourcing services to the UK pay VAT?
I operate through a single member limited liability company (LLC) registered in the US. The work is outsourced to independent contractors in several Latin American countries. The LLC’s clients are UK-registered businesses. For the past ten years, I have lived as a digital nomad, with no residency anywhere and never spending more than 30 days a year in the US or UK, despite the fact that I am a UK citizen.
I have two questions:
- If I have to pay VAT is it only on the income from the clients located in the UK or all my clients?
- Do I only need to pay if it is over a specific amount? I read somewhere about a threshold of £85,000 of VATable income a year?
I hope readers can help with these issues.
Query 19,870 – Digital Nomad.
