.png)
.png)
Leasehold extension
Tax charges on leasehold extensions.
A flat management company was formed to purchase the freehold of 50 flats and granted 125-year leases to its shareholders. The leases currently have an unexpired term of 92 years, and it is wished to increase the term by 999 years for which no premium will be charged.
As there is no consideration, it is understood that there will be no liability to stamp duty land tax on the extension, but the leaseholders would be deemed to have received a dividend equal to the amount by which the lease has been undervalued (presumably the premium that could have been charged).
However, it is also understood that the extension of the leases would be a deemed disposal by the management company of part of the freehold at market value for capital gains tax purposes, calculated on the part-disposal basis, and that this would not arise if the management company held the leases on trust for the leaseholders/shareholders, which is normal practice.
Can readers please advise if this is correct and what, if anything, can now be done to prevent any tax charges arising on the management company and its shareholders if the leases are extended in the proposed manner? Would it be worth waiting for the expected changes under which the ‘marriage value’ in the calculation of the lease valuation would be replaced?
Query 19,959 – Flat Man.
Fire equipment
Is there VAT on essential fire safety equipment?
Following the disastrous Grenfell fire, the Royal Borough of Kensington and Chelsea is not surprisingly insisting on flat entry doors being fully fire compliant with latest legislation, and moreover requiring a fire certificate to demonstrate such compliance. Such doors seemingly cos in the region of £2,000, being standard VAT inclusive.
I am surprised that this essential fire safety equipment is incurring a standard VAT flat rate of 20%, and would be most grateful if readers would confirm whether this is correct.
Query 19,960 – Puzzled.
Partnership transfer
Transfer of deceased partner’s share to partnership.
I act for a partnership of three partners where profits, losses and gains are shared equally. The partnership agreement says that on the retirement or death of a partner, their interest in the partnership assets would be sold to the remaining partners. One of the partners has just died and I am trying to work out the capital gains consequences.
At first sight it seems straightforward. On the partner’s death, the fellow partners will acquire a one-third share of the partnership assets at their agreed market value. There is no tax on the disposal as death is not an occasion of charge for capital gains tax purposes. But I am worried that it may be more complex than this.
First, it is not the deceased partner making the disposal, it is the executors after death who are making the disposal to the remaining partners. Does that mean that the executors are treated as making a disposal at market value? There may be no gain if they sell straight away as their base cost will be market value on death and that is unlikely to increase in the period before sale.
But there is a further complication. The partnership agreement states that the sale should be at market value less a discount of 10%. If the executors acquire the share at market value but then sell for 90% of that value there is a loss, is that an allowable loss if the executors and the continuing partners are not connected persons? Or must market value be used rather than the sale proceeds?
Is there anything for me to worry about here?
Query 19,961 – Bristolian.
Private tuition
Flower arranging and VAT dilemma.
I read Neil Warren’s article, ‘Tuition turmoil’ (Taxation, 3 March 2022, page 24), about subjects that qualify as being exempt from VAT as far as private tuition is concerned. One of my sole trader clients trades as a florist and her sales are just below the VAT registration threshold. But she has recently started giving group and one-to-one courses in flower arranging and plants. Her students are all private individuals.
I told my client that the income would be exempt from VAT because there are many courses in horticulture, including HNC and HND courses, and it is a common subject at a lot of colleges. So, it would qualify for VAT exemption as a subject that is ‘ordinarily’ taught in a school or university. But having read Neil’s article, and the First-tier Tribunal decision in the Lalou case (TC8380), I am not so sure if I have advised my client correctly.
Would an alternative option be for my client to treat her tuition work as a partnership with her mother, who is also interested in flowers, a separate legal entity, so to speak? Both businesses would then trade below the annual £85,000 VAT sales threshold.
Readers’ thoughts would be appreciated.
Query 19,962 – Jersey Lily.
