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Readers' Forum
Loose Ends
Readers' planning points, pitfalls and other correspondence.
Sharkey v Wernher
In 'Sharkey Revisited', in Taxation, 24 July 2003 at pages 443 to 446, I set out reasons why I felt that the decision in Sharkey v Wernher 36 TC 275 could be challenged, either as always having been wrong or at least having been obsolete since the introduction of section 42, Finance Act 1998.
Readers' Forum
Loose Ends
Readers' planning points, pitfalls and other correspondence.
Sharkey v Wernher
In 'Sharkey Revisited', in Taxation, 24 July 2003 at pages 443 to 446, I set out reasons why I felt that the decision in Sharkey v Wernher 36 TC 275 could be challenged, either as always having been wrong or at least having been obsolete since the introduction of section 42, Finance Act 1998.
As a postscript, it was announced by the Inland Revenue on 2 August 2004 that the rule would not now be codified in the Income Tax (Trading and Other Income) Bill due before Parliament in the autumn.
This means that for accounting dates post 5 April 2005, it will remain open to taxpayers to challenge any adjustments to profits by virtue of the Sharkey v Wernher rule.
Keith Gordon, London.
Pre-owned chattels
The case of MacPherson v Commissioners of Inland Revenue [1988] STC 362 gave a very useful illustration of how chattels such as works of art can be given away by the owner and subsequently enjoyed by him or her without any gift with reservation arising for inheritance tax purposes. So long as a payment is made for enjoyment of the chattels and it is accepted by the Revenue as representing full consideration, no gift with reservation of benefit will arise. One per cent of the market value of the items might be an acceptable amount to pay per annum.
However, what about the new income tax charge on pre owned assets? Paragraph 6 of Schedule 15 to the Finance Act 2004 is clearly designed to catch these schemes, and paragraph 7(1) allows only payments made 'in pursuance of any legal obligation' to be deducted.
Confusingly, however, there is an exemption from this charge under paragraph 11(5)(d) for cases which would fall within the gift with reservation provisions 'but for section 102C(3) of, and paragraph 6 of Schedule 22 to, the 1986 Act'. It has recently been reported (by Emma Chamberlain of Counsel) that the Revenue agrees that this exemption applies those two provisions of the 1986 Act independently and so any case which falls within paragraph 6 of Schedule 20 (full consideration given) is within the exemption from the pre-owned asset charge.
It is perhaps a little early to breathe a sigh of relief, but hopefully the promised Revenue guidance note on pre owned assets will confirm this reading of Paragraph 11(5)(d). If so, taxpayers can carry on planning with chattels as if nothing untoward has happened.
Malcolm Gunn,
Tax Consultant, Haarmann Hemmelrath.
Trustees' word
Section 81, Inheritance Tax Act 1984 provides for property transferred from one trust to another to be treated as remaining comprised in the transferor trust for inheritance tax purposes.The inheritance tax charge that would normally arise on property ceasing to be relevant property does not, therefore, apply on the transfer but ten-year anniversary charges would continue to apply to the transferor trust by reference to its commencement date.
In the real world, there would be one trust, but there would be two, with different ten-year anniversary dates, etc., for inheritance tax purposes.
In a recent instance where there had been such a transfer, there was then a capital advance giving rise to a section 65 charge on the property ceasing to be relevant property. As the commencement dates of the trusts, the value of the property comprised in them and previous inheritance tax charges etc. could affect the rate of inheritance tax chargeable on the capital advanced, it was important to establish which trust, i.e. the trust which transferred the property or the trust which received the property, made the capital advance.
Readers will be interested to know that I was told by Inland Revenue Capital Taxes that it was up to the trustees to decide where the capital advanced came from and that it would generally accept the trustees' decision.
Chris Jones,
Chantrey Vellacott DFK.
Missing post
Am I alone in wondering if the Revenue's recovery offices are being selective about the letters they say that they have received, or have I just been unlucky?
I recall more than one occasion when, despite replying to letters from recovery offices to clients warning of distraint proceedings, etc. to explain the reasons(s) for delay, tell them when outstanding tax returns would be submitted and asking for confirmation that no further action would be action pro tem, the Revenue has taken further action, often with Revenue officers calling at the client's home.
Once I become aware of the Revenue's action, I telephone the recovery office and am told that there is no trace of my letter. I know the postal service is not perfect (what is?), but it is odd that letters to recovery offices enclosing cheques seem to arrive without fail.
Other practitioners who may have suffered similarly, may also find it helpful to call the Revenue to check that their letters have arrived safely.
Chris Jones,
Chantrey Vellacott DFK.
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