How is the gain on ultimate sale of property calculated?
My client purchased a plot of land in 1985 and built a rental property on it in the following year. After 20 years, that property was demolished and a new larger property was built on the land. This was again rented out. She is now intending to sell the freehold of the land and property. She has asked me whether or not she can include the costs of building and then demolishing the old property in the calculation of the gain on the ultimate sale.
Had she purchased the land with the original property already built then I think that the answer would have been ‘yes’, as the land and buildings are treated as one asset. But because the old property was built after the purchase of the land it counts as enhancement expenditure and as it is no longer reflected in the state of the property when it comes to be sold I think that the answer to her question must be ‘no’.
Do readers agree? In economic terms there is very little difference between her having bought the land for, say, £50,000 and spending £100,000 on a building, and paying £150,000 for the land and building together, so the fact that there are two different tax results does seem odd.
Query 20,519– Dickens.
Solicitor VAT charges.
I have taken on a new client who is a recent immigrant to the UK. He has brought in the usual bundle of unsorted paperwork and business records for me to turn into a set of accounts.
Going through these, I noticed that he had included an invoice from a local lawyer for services connected with his application for the right to remain in the UK but that no VAT had been charged on the invoice. While this does not have any impact on my client’s income tax liability as the cost is not allowable, I wonder if I have any anti-money laundering reporting obligations here in respect of the solicitor not charging VAT which surely must be due.
The solicitor is quite well known in this practice area and has a big practice so I can’t believe that he is trading under the VAT threshold.
Any advice would be greatfully received.
Query 20,520– Tippings.
Section 455 implications of loan.
I have a nagging doubt in my mind somewhere that there is a CTA 2010, s 455 issue in the circumstances I describe below. I know that s 455 deals with loans to individuals but I vaguely remember being told a long time ago that it can also apply to loans between connected companies.
My client Mr A owns 51% of company X. The other 49% is owned by a number of small shareholders none of whom are connected or related to Mr A.
Mr A also owned 50% of company Y. The other 50% is owned by Mr B. Mr A and Mr B are unrelated. There are no provisions in the articles dealing with what happens if company Y is deadlocked.
Company X is proposing to lend (on commercial terms) £150,000 to company Y. Does a s 455 liability arise on the making of the loan? Even if it does, are there any other tax issues which need to be considered? For example whether company X and company Y are associated with each other.
This must be a relatively common situation but I can never quite get my head around the rules. Can Taxation readers help me to avoid a headache?
Query 20,521– Riddle.
Can we split business again?
I have a new client who operates as a talent agency and he also has a stage school which encourages actors to develop their skills to a professional standard.
Until 2021, the two activities operated as separate limited companies and both were registered for VAT. At that point, it was decided to consolidate both activities into the talent agency company to save costs. The stage school company has remained dormant since then.
However, after a difficult couple of trading years, the turnover of the stage school activity has declined and is now much less than the annual VAT deregistration threshold of £88,000. The client has asked if it would be acceptable to split the businesses back into two companies – by transferring the stage school income back to the dormant company - and not have to register this activity for VAT. All of the school’s customers are private individuals who cannot claim input tax.
Ownership of the two companies until 2021 was slightly different (a different mix of shareholders) and different directors looked after each business but both activities are now controlled by the same director who is a 100% shareholder of both companies.
Do readers anticipate any problems with reverting to the previous structure or would this create a potential business splitting challenge from HMRC?
Query 20,522 – Gielgud.
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