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12 November 2019
Issue: 4720 / Categories: Forum & Feedback
Discretionary trust problem; Disputed interpretation; Disincorporation; Unhappy visit

Discretionary trust problem

Property considerations with discretionary trust

My client is the trustee of a discretionary trust that was set up by her mother. The trust property was a share in a flat that the mother lived in, where she paid a full market rent to avoid the pre-owned assets tax, and she met all the running expenses of the property herself.

The mother has now died, and the property has been put up for sale. I have three main questions.

  • Will the running expenses in the void period up to sale, now being met by the trustees, be deductible against the rent paid in the earlier part of the tax year by the mother?
  • Will the gain on the property be chargeable in the hands of the trustees, because the mother did not occupy under the terms of the trust but by virtue of an arm’s length licence?
  • Because the trust owned only half the flat (the mother owned the other half), will the base cost have to be discounted from ‘half the value of the whole’ when the trust was set up in 2010?

I will be grateful for any help that Taxation readers can provide, including any other questions that I might not have considered.

Query 19,467 – Trusty.

Disputed interpretation

Interaction of non-resident CGT rules with holdover relief

I am dealing with land which had previously been a business asset that has been gifted by a UK resident donor to a non-resident. This situation is covered in the department’s Capital Gains Manual at CG66886).

TCGA 1992, s 167A(4) refers to s 165(6) to give the interpretation of the held-over gain. Section 165(6) says that this is the gain which would have accrued if s 165 is not claimed. Although it is the case, broadly, that the non-resident capital gain that accrues is taken from 6 April 2015 (for UK residential land held at that date) or from 6 April 2019 (for non-residential land) to the date of disposal (the amount that HMRC say can be held over under s 167A), the remainder of the gain drops out of charge (because the non-resident disponor was not within the scope of capital gains tax before those dates).

HMRC seems to be saying that if a s 165 claim is made by a UK resident for a gift to a non-resident, any pre-2015-2019 gain is chargeable, even if it were a business asset.

That does not seem to be right to me. Holdover relief was never allowed for a transfer to a non-resident because any gain subsequently made by the transferee would not be chargeable, so the relief could never be recovered.

Now, if s 167A applies, the held-over gain is not rolled over into the transferee’s cost but is frozen until the subsequent disposal of the asset. The frozen gain is explicitly treated as a relevant gain and charged accordingly so the relief can be recovered in full at that point. So logically there is no reason to restrict the relief as HMRC says it should be.

I have to confess that I find it difficult to understand the legislation because of the various deeming provisions.

Are there any Taxation readers who can help me to see through the fog?

Query 19,468 – Confused.


Valuation of goodwill on disincorporation

I have a client who is an osteopath. A few years ago she incorporated her business, valuing goodwill on a turnover-linked basis that was apparently common in the profession. She has never liked the discipline that being a company imposes, and she would like to disincorporate.

Under the rules in force at the time, she paid capital gains tax on the transfer of goodwill into the company and received no deduction for amortisation of goodwill.

If she dissolves the company and carries on trading, presumably the company will dispose of the goodwill back to her. Would it then be correct to value it on the same basis she used on entry, and treat the result as a capital gain?

I have heard that there are horrible complications on disincorporation, but I have never dealt with one before. Any guidance that Taxation readers can offer would be welcome.

Query 19,469 – Cruncher.

Unhappy visit

Incorrect VAT charge disallowed by HMRC

One of my property developer clients has a major VAT problem following a recent visit from HMRC.

A building contractor charged him £900,000 plus 20% VAT on a residential project that apparently qualified for zero-rating. The officer disallowed £180,000 of input tax on the basis that it can only be claimed on correctly charged VAT. The officer told my client to get a VAT credit from the supplier.

However, the contractor went into liquidation in 2017 – the invoice in question was raised in 2016. Is there any way around this problem?

The EU principal of VAT not being a cost to a business that only makes taxable supplies seems to be an issue here and it is very unfair that my client has paid this VAT in good faith, based on a proper tax invoice, but is now being penalised.

Readers’ thoughts would be appreciated.

Query 19,470 – The Adjudicator.

Issue: 4720 / Categories: Forum & Feedback
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